Acknowledgement

A comprehensive account of the process of determining the reasons or finding out the factors which influences the investors in Ludhiana to invest in stock market along with the research undertaken to understand the capital market in an effective manner is presented in this report on the basis of information secured from the survey conducted and other secondary sources. I deeply appreciate the highly professional and logical approach taken by all with whom I interacted in Ludhiana Stock Exchange Ltd for my project. I am grateful to Ludhiana Stock Exchange Ltd which took me as a summer trainee and provided the necessary information required to proceed with my project. The Exchange provided an opportunity to understand the subject undertaken and see how the stock market works and how to contact the investors for analysis of factors. I would like to express special thanks to the Executive Director and Company guide- Pooja M Kohli for giving me this opportunity to work with the Exchange for 12 weeks and to get a hands of experience about the Stock Exchange. I would also like to express my gratitude to Mr. Sadhuram for his continued and invaluable time and guidance provided to me without which it would have been difficult to do justice to the project. I would also like to express my thanks to my faculty guide Prof. G Suresh of ICFAI Hyderabad for his constant guidance and suggestions which again were very important as they formed the foundation of the project undertaken. I would also like to express my gratitude to all those investors who despite of having a very busy schedule gave his valuable time and opinion for my survey. Any omission in this brief acknowledgement does not mean lack of gratitude.

ICFAI Business School, Hyderabad June 2, 2012

Sameer Jhanji 11BSPHH010708

Executive Summary

Ludhiana Stock Exchange Ltd is one of the leading regional stock exchanges in India and is promoted largely by Vardhman and Hero Honda Group and other leading industrial luminaries and it fulfills the vital need of having a stock exchange in the northern part of the country. I had got the opportunity to work with this esteemed organization for my summer internship program and learnt a lot about what is happening in the capital market.

The Global Economy has been affected in recent decades by powerful trends and powerful shocks. The global financial system has evolved in response to the structural changes in the world economy, the risks associated with the shocks and the response by policy makers. Number of unfavorable factors such as instability in the US & Middle East, the Earthquake, tsunami and radiation disaster in Japan, inflation, rising oil and commodity prices along with persistent global imbalance continues to hamper global growth. These global developments have an impact not only on international investors but also on domestic Indian Investment climate.

In the project Capital market and factors affecting Investors to invest in Stock market. I have dealt with the reforms that capital market have undergone through over a period of time, regulatory framework governing the capital market, Global Economic environment and last but not the least tried to understand the investors perception towards the capital market and the factors they generally consider while making an investment decision in the stock market. For that I designed a questionnaire and conducted the survey by getting the responses of investors in the city of Ludhiana. On the basis of those responses I used a statistical tool SPSS to run factor analysis the details of which are presented in project analysis.

INTRODUCTION TO INDIAN FINANCIAL SYSTEM

Finance is the lifeblood of any business. Any financial system is entirely dependent upon the inter play of various forces and activities leading to the generation of funds and its utilization. It consists of two important segments: 1. Money Market. 2. Capital Market. The growth of economy of any country depends upon its effectiveness of both of these segments. It provides for payment mechanism and enables the pooling of much needed funds to corporate and Govt. for their needs. The growth in the Indian Financial system is in consonance with the growth in Indian economy. Indian Financial system especially after path breaking economic reforms in 1991 has emerged on the scene as a healthy and vibrant system and has witnessed emergence of wide range of financial institutions and products providing a variety of services. There has been a significant expansion of network of commercial banks both public and private and a large number of varieties of schemes. There has also been remarkable growth in both primary as well as secondary segments of Stock market.

NEED FOR STRONG FINANCIAL SYSTEM

Indian Financial system comprises of huge infrastructure built over a number of years and consists of money market and capital market. Ministry of Finance, Govt. of India is the ultimate body controlling the Indian Financial system. Indian Financial system comprises of Banking, Insurance, and Mutual Fund and Capital market and provides the much needed fuel required for the running of the engines of the economy. Any hindrance in any of these sectors would cause the engine of the economy to deaccelerate. Smooth functioning of these sectors envisages that the economy runs at a faster and uninterrupted pace. Interplay of these forces requires minimum of the interference from the Govt. side and expects that let the market forces determine the priority and flow of the money. Regulatory bodies should provide the guiding track and strong mechanism to prevent unscrupulous entities to hijack the systems to their advantage at the cost of the majority. The regulator is also required to support the growth and there should be minimum entry level for the market players so as to encourage the competition.

Capital Market especially secondary market is the focus under the project so I will be discussing capital market in detail under this study.

CAPITAL MARKET

The term Capital Market refers to the institutional arrangements for facilitating the borrowing and lending of long term funds. In the widest sense, it consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises and public authorities. It is concerned with those private savings, individuals as well as corporate, that is turned into investments through new capital issues and also new public loans floated by govt. and semi govt. bodies. A Capital market may be defined as an organized mechanism for effective and efficient transfer of money- capital or financial resources from the investing parties i.e. Individuals or institutional savers to the entrepreneurs engaged in Industry or Commerce in the business either is in the private or public sectors of an economy.

OBJECTIVES AND IMPORTANCE OF CAPITAL MARKET

An efficient Capital Market is a pre-requisite of economic development. An organized and well developed capital market operating in a free economy ensures best possible coordination and balance between the flow of savings on one hand, and the flow of investment leading to capital formation on the other, directs the flow of savings into most profitable channels and thereby ensures optimum utilization of financial resources. Thus, an ideal Capital Market is one where finance is used as a handmade to serve the needs of Industry. Finance is available at a reasonable rate of return for any proposition which offers a prospective yield sufficient to make borrowing worthwhile, the development of savings, proper organization of intermediary institutions and the entrepreneurial qualities of the people. The Capital Market must facilitate the movement of Capital to the point of highest yield. Thus a capital market strives for: The mobilization or concentration of national savings or economic development. Mobilization and import of foreign capital and investment to augment the deficit in the required financial resources so as to maintain the expected rate of economic growth.

EFFICIENCY OF CAPITAL MARKET

The efficiency of Capital Market is often defined in terms of its ability to reflect the impact of the relevant information in the prices of the securities. An efficient market is one, which ensures that the prices of the securities quickly adjust to new information and reflect it in market price of the securities. Economists define three degrees of market efficiency namely 1. Weak Form of Efficiency: In the first level, prices reflect the information contained in the record of past prices. If markets are efficient in the weak sense, then it is impossible to make consistently superior profits by studying past returns. Prices will follow a random walk. 2. Semi Strong form of Efficiency: The second level of efficiency requires that prices reflect not just past prices but all other published information, such as one might get from reading the financial press. If markets are efficient in this sense, then prices will adjust immediately to public information such as the announcement of last quarters earnings, a new issue of stock, a proposal to merge two companies and so on. 3. Strong Form of Efficiency: Finally there may be a strong form of efficiency, in which prices reflect all the information that can be acquired by painstaking analysis of the company and the economy. In such a market we would observe lucky and unlucky investors, but we wouldnt find any superior investment managers who can consistently beat the market. So, in any efficient Capital Market, there is no reason to believe that the current price is too low or too high, but the efficiency is reflected that is how fast the information makes its impact on the prices of the shares.

ECONOMY INDUSTRY ANALYSIS

ROLE OF CAPITAL MARKET IN INDIA
Indias growth story has important implications for the capital market, which has grown sharply with respect to several parameters such as amount raised, number of stock exchanges, listed stocks, market capitalization, trading volumes and turnover, market instruments, investor population, issuer and intermediary profiles. The Capital Market consists primarily of debt and equity markets. Historically it contributed significantly to mobilizing funds to meet public and private companies financing requirements. The introduction of exchange-traded derivative instruments such as options and futures has enabled investors to hedge their positions and reduce risks. Indias debt and equity markets rose from 75 percent in 1995 to 130 percent of GDP in 2005. Indias debt market comprises of Govt. bonds and corporate bond market (PSUs, corporate, financial institutions and banks). India competes well with other emerging economies in terms of sophisticated market design of equity spot and derivatives market, widespread retail participation and resilient liquidity. The number of foreign institutional investors registered with SEBI rose from none in 1992-93 to 528 in 2000-01, to about 1000 in 2006-07. Indias stock market rose five-fold since mid 2003 and outperformed world indices with returns far outstripping other emerging markets, such as MEXICO (52%), BRAZIL (43%), or GCC economies such as KUWAIT (26%) in FY 2006. In 2006 Indian Companies raised more than $6 billion on the BSE, NSE and other regional stock exchanges. Apart from these figures Capital Market performs the following important functions: 1. The Capital Market fulfills the transfer function of current purchasing power, in monetary form, from companies having a surplus of funds to those who have a deficit, in exchange for reimbursing a greater purchasing power in future, in this way the Capital Market makes possible to separate the saving act from the investment one. 2. The Capital Market Mechanism allows not only an efficient allocation of financial resources available at a certain moment in an economy from the marketers point of view but also permits to allot funds according to the return and risk from the investors point of view. Covering the risk, that could be realized by the help of different operations, market orders or derivatives, defines the function of insurance against risk, specific function of capital markets. Thus it will not be wrong to say that in developing countries we should pay the same attention to the set up and development of an efficient capital market in the same way in which there are pre-occupations for the infrastructure or telecommunications development. This becomes even more important in developing economies like India taking into account the necessity of resources orientation from the inefficient sectors towards the efficient ones, being thus ensured the increasing efficiency in economy, being supported both the economic reform process and the privatization process. The Stock Exchange is labeled as Resonance Box for the economical, political and social events, internal and international, reflecting as a real barometer of the state of the economy.

ROLE OF CAPITAL MARKET IN INDIAS INDUSTRIAL GROWTH:

1. Mobilization of Savings and acceleration of Capital Formation: In developing countries like India plagued by paucity of resources and increasing demand for investments by Industrial Organizations and governments, the importance of capital market is self evident. 2. Promotion of Industrial Growth: The Capital Market is a central market through which resources are transferred to the industrial sector of the economy. The existence of such an institution encourages people to invest in productive channels rather than in the unproductive sectors like real estate, bullion etc. Thus it stimulates industrial growth and economic development of the country by mobilizing funds for investment in the corporate securities. 3. Raising long term capital: The existence of the stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent period but companies require funds permanently. The Stock Exchange resolves this clash of interests by offering an opportunity to investors to buy or sell their securities while permanent capital with the companies remains unaffected. 4. Ready and continuous market: The Stock Exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. The element of easy marketability makes investment in securities more liquid as compared to other assets. 5. Proper channelization of funds: An efficient capital market not only creates liquidity through its pricing mechanism but also functions to allocate resources to the most efficient industries. The prevailing market price of a security and relative yield are the guiding factors for the people to channelize their funds in a particular company. This ensures effective utilization of funds in the public interest. 6. Provision of a variety of services: The financial institutions functioning in capital market provide a variety of services, the more important ones being the following: Grant of long term and medium term loans to entrepreneurs to enable them to establish, expand or modernize business units Provision of underwriting facilities. Assistance in the promotion of companies (This function is done by the development banks like the IDBI). Participation in equity capital. Expert advice on management of investment in industrial securities.

Structure of Indian Capital Market

Broadly speaking the capital market is classified into two categories. They are the Primary Market (New Issues Market) and the Secondary Market (Old or existing issues market). The classification is done on the basis of the nature of the instrument brought in the market. However on the basis of the types of institutions involved in the capital market, it can be classified into various categories such as the Government securities market or Gilt edged market, Industrial Securities Market, Development Financial Institutions(DFIs) and Financial Intermediaries. All these components have specific features to mention. The Structure of Indian capital market has its distinct features. These different segments of the capital market help to develop the institution of capital market in many dimensions. The Primary market helps to raise fresh capital in the market. In the Secondary market, the buying and selling (Trading) of capital market instruments take place. The following chart will help us in understanding the Organizational structure of the Indian Capital Market.

1. Government Securities Market: This is also known as Gilt -edged securities market. This
refers to the market for Government and Semi-Government securities backed by the Reserve Bank of India (RBI).

2. Industrial Securities Market: This is a market for industrial securities i.e. market for shares
and debentures of the existing and new corporate firms. Buying and selling of such instruments takes place in this market. This market is further classified into two types such as New Issues Market and Old Issues market. In Primary Market fresh capital is raised by companies by issuing new shares, bonds, units of mutual funds and debentures. However in the Secondary Market

already existing i.e. old shares and debentures are traded. This trading takes place through the registered stock exchanges. In India we have three prominent stock exchanges. They are the

Bombay Stock exchange (BSE), the National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI).

3. Development Financial Institutions: This is yet another important segment of Indian Capital
Market. This comprises of various financial institutions. These can be special purpose institutions like IFCI, ICICI, SFCs, IDBI, IIBI, UTI, etc. These financial institutions provide long term finance for those purposes for which they are set up. 4. Financial Intermediaries: The fourth important segment of the Indian Capital Market is the financial intermediaries. This comprises various merchant banking institutions, mutual funds, leasing finance companies, venture capital companies and other financial institutions. Thus, these are the important institutions and segments in the Indian Capital Market.

Classification of Security Buyers or Major players in Capital Market:

The various buyers of corporate securities include Individuals, speculators, Joint Stock Companies, Life insurance companies, Commercial Banks, Public Provident funds, underwriters, trustees, investment bankers, Industrial Development Bank of India( IDBI), Industrial Credit and Investment Corporation of India( ICICI), Industrial Finance Corporation of India(IFCI), State Financial Corporations( SFCs), State Industrial Development Corporations( SIDCs) etc. Primarily the savings and surplus of individuals, jointstock companies and public and private institutions are invested in the corporate securities. Thus we can broadly classify the investors into three categories: 1. Individual Investors 2. Joint-Stock Companies 3. Institutional Investors

1. Individual Investors
The savings of the individuals are the ultimate source of investment in corporate securities. According to an estimate the number of individual investors in shares was 4.87 lakhs in 1959, 10.65 lakhs in 1965, 20 lakhs in 1980 and about 100 lakhs in 1989. The number of Individual investors has been increasing over time. At the end of 1994, it was well above 200 lakhs. Inspite of increase in number of investors as a percentage of total population have remained negligible in India compared to other countries like USA, Germany and UK. The various individual investors of securities may be classified under three broad categories: (a) Real Investors (b) Speculators

(c) Individuals who are affiliated with the issuing company.

(A) Real Investors: They are the individuals who have the surplus of income or past accumulated
wealth and which they wish to invest for making future income. Such investors who are not affiliated with the issuing company either as existing shareholders or as creditors or customers of the company etc are termed as real investors. There are numerous investment opportunities available to such investors, including Government and corporate securities. Individuals prefer to make investment in such securities which provide them better security of investment i.e. minimum risk, stable returns, liquidity i.e. easy marketeability, capital appreciation and growth, lesser tax burden, favorable denomination and period of maturity and pride of ownership or control. The preferences of individual investors may vary according to their age, income, habits, education etc. But the prime motive of investing in corporate securities, for all types of investors, is to earn higher income. Debentures and Preference shares may be preferred by investors who want to take lesser risk and earn fair, regular and stable returns. At the same time, the investors who are prepared to take risk for earning higher returns and considerable appreciation in investments would prefer to invest in equity shares. (B) Speculative Investors: There are certain investors who purchase securities with speculative motives. They are not real investors. Their aim is to sell the securities and make capital-gains through wide fluctuations in the value of securities. There are two types of speculators, namely bulls and bears. A bull is an operator who expects a rise in prices of securities in future. In anticipation of price rise he makes purchases of shares and other securities with the intention to sell at higher prices in future. He, being a speculator, has no intention to retain investments in securities. A bear, on the other hand, expects prices to fall in future and sells securities at present with a view to purchase them at lower prices in future. He tends to force down the prices of securities in order to make gains through price fluctuations. (C) Individuals affiliated with the Issuing Company: The existing companies usually prefer to sell their fresh issues to its customers, employees, creditors and existing shareholders etc. This category of Individuals investing in securities includes those persons who are affiliated with the issuing company in one way or the other. There are many advantages of selling securities to this category of investors. A company can successfully attract its customers or dealers to purchase its securities. Public Utility Companies can easily explore this type of investors. Some companies in the past have also approached with success its customers to invest in the securities of the company. The major advantages of selling securities to customers include wide distribution of securities, reduced chances of speculation, lesser cost, and easier price fixation. But selling the securities to customers has certain drawbacks also as it lacks flexibility and the company to maintain satisfactory relations and prestige with its customers has to usually pay a minimum fixed dividend or interest regularly to them. In the same manner, a company may be able to sell

its securities to its creditors also. They are usually seen as the good prospects for raising capital at the time of re-organization of a company.

The Government of India in 1985 introduced Employees Stock Option Scheme to encourage employees participation in management. As per guidelines issued by the SEBI, Employee Stock Option Scheme is voluntary on the part of the company to encourage employees to have a higher participation in the company. As per the scheme, reservation should not be more than 5% of the issue to be equally distributed among the employees. The issuer may have nontransferability at his discretion in new issues and in other cases; employees participation up to 5% (Maximum 200 shares) shall be non-transferable for a period of three years. The Companies have been advised to ensure that the shares reserved under employees quota be allotted only to bonafide employees. This scheme finds success in selling securities to the employees and the company has to incur much lesser costs in marketing securities to them. Existing Companies may also sell securities to its existing stock/bond holders. The Companies Act 1956 has provided for a pre-emptive right to the existing shareholders of a company. According to section 81 of the Companies Act, 1956, whenever a public limited company proposes to increase its subscribed capital by the allotment of further issues, the expiry of two years from the formation of the company or the expiry of one year from the first allotment of shares in the company, such shares must first be offered to holders of equity shares in proportion as nearly as circumstances admit to the capital paid up on these shares. Such issue of shares is called Rights Issue. SEBI has issued certain guidelines to be followed by the company making rights issue. So we may point out that by selling securities to the existing shareholders a company is benefited by way of reduced costs of marketing the securities as well as the certainty of success in the sale of securities.

2. Joint Stock Companies:

After individuals, the Joint Stock Companies are the next important group of investors in the corporate securities. According to a recent study of the Industrial Development Bank of India (IDBI) the share of joint stock companies in the total paid up capital of the private sector was 31%. But their share in the investors world has been declining over the years. The Ownership of securities by the Joint-Stock Companies is in a way indirect rather than direct ownership of securities by the individuals.

3. Institutional Investors:
The Institutional investors have emerged as the most important group of investors in corporate securities. The various institutional investors may be further classified into three categories namely private institutional investors, Public Financial institutions and foreign institutional investors.

Private Institutional investors include on the one hand institutions such as Life Insurance Companies, Investment Trusts, UTI, Commercial Banks etc which invest their own funds and on the other hand those which invest on behalf of their clients or their own funds for short-term. The Second type of private Institutional investors include Underwriters, Issue houses, Investment Bankers and Trustee Companies. The Public Institutions represent various Government agencies engaged in promotion and financing of business enterprises. These include IDBI, NIDC, IFCI, ICICI etc. It is the financial institutions which have emerged as the most important group of investors in corporate securities in the recent years. A recent study of IDBI has shown that the share of financial institutions in the total paid up capital of the private sector was to the tune of 27.3%. The Liberalization policy has increased the scope and importance of institutional investors in the Indian Corporate sector. With the opening up of the economy, Foreign Institutional Investors have also joined the band of investors. In fact they are becoming the major players in the securities market. In the process, securities markets are being institutionalized.

CAPITAL MARKET REFORMS (1991-1995)

1. Setting up of Securities and Exchange Board of India (SEBI) with autonomous power as a regulatory authority over various constituents of the capital market. 2. Launching of Over the Counter Exchange of India (OTCEI) a second-tier bourse permitting smaller companies to raise funds. 3. Insider trading made an offence. 4. New Industrial Policy and a package of measures to boost industrial investment announced by the Government. 5. Guidelines for disclosures and Investors protection issued. 6. New Guidelines issued for preferential offers, rights and bonus shares. 7. Minimum subscription for public issue has been raised. 8. Proportionate allotment of shares for all public issues cleared by SEBI after January 1, 1994 has been made mandatory. 9. Capital Adequacy norms for brokers announced: For brokers to BSE and CSE minimum deposit required is Rs 5 lakhs each, For Delhi and Ahmadabad Rs 3.5 lakhs etc: For remaining stock exchanges Rs 2 lakhs each. 10. Rules relating to portfolio managers and mutual funds announced. A number of private sector mutual funds launched schemes to mobilize funds for investment. 11. Relaxation in the provisions of Foreign Exchange Regulation Act, 1973 (FERA) and MRTP Act, 1969. 12. Foreign Institutional Investors (FIIs) registered by SEBI and private placement of issues with FIIs. 13. National Stock Exchange (NSE) began on line scripless trading in India. 14. Abolition of licensing system. 15. Promoters required to subscribe to at least 25% of the equity in each class of instrument when more than one instruments is offered to the public. 16. Indian companies have been permitted to float Global Depository Receipts, Euro Equity issues, Floating rate of interest notes in various foreign countries. 17. Clearance for financial institutions and banks for their capital issues has been made mandatory. 18. Full convertibility of rupee on trade as well as on current account announced. 19. Forward trading was banned and a new trading system called the twin-track system was introduced. 20. Foreign Equity Investments of Multi-National Corporations (MNCs) increased to 51% of equity capital in their subsidiary companies in India.

CAPITAL MARKET REFORMS (1996-2002)

1. To provide greater flexibility, SEBI gave up vetting of public issue documents. 2. To encourage the development of debt market, debt issues not accompanied by an equity component permitted to be sold entirely by the book building process subject to section 19(2)(b) of the Securities Contracts (regulation) Rules. 3. Stock exchanges asked to modify the listing agreement to provide for payment of interest by companies to investors from the 30th day after the closure of a public issue. 4. Uniform good-bad delivery norms and procedure for time bound resolution of bad deliveries, through Bad Delivery Cells, prescribed. 5. Several restrictions including limits on the size of issues proposed to be listed on OTCEI removed, and listing criteria for OTCEI relaxed. 6. The promoters contribution for public issues has been made uniform @ 20% irrespective of the issue size. 7. The SEBI (Registrars to an issue and Share Transfer Agents) Rules and Regulations, 1993 have been amended to provide for an arms length relationship between the Issuer and the Registrar. 8. Only body corporate is now allowed to act as merchant bankers. 9. Companies are now required to make their partly paid up shares fully paid up or forfeit the same before making a public or rights issue. 10. SEBI regulations enabling companies to buy-back their shares have been framed. 11. Requirements to publish unaudited results by listed companies on quarterly basis. 12. Introduction of rolling settlement in respect of Demat securities. 13. Compulsory trading of shares in dematerialized form in specified scrips by institutional investors. 14. Companies have been given freedom to determine the par value of shares issued by them. 15. SEBI modified framework for book building. 16. SEBI accepted a system envisaging the use of existing infrastructure of stock exchanges for marketing initial public offers. 17. Introduction of derivatives trading in June 2000. 18. Introduction of compulsory rolling settlement. 19. Extension of derivatives trading in equity to index options, stock options and stock futures.

CAPITAL MARKET REFORMS (2003 to till date)

1. After the legal framework for derivatives trading was provided by the amendment of SCRA in 1999 derivatives trading started in a gradual manner with stock index futures in June 2000. Later on options and single stock futures were introduced in 2000-2001 and now India s derivatives market turnover is more than the cash market and India is one of the largest single stock futures markets in the world. 2. India's risk management systems have always been very modern and effective. The VAR based margining system was introduced in mid 2001 and the risk management systems have withstood huge volatility experienced in May 2003 and May 2004. This included real time exposure monitoring, disablement of broker terminals, VAR based margining etc.

3. India is one of the few countries to have started the screen based trading of government securities in January 2003. 4. In June 2003 the interest rate futures contracts on the screen based trading platform were introduced

. 5. India is one of the few countries to have started the Straight through Processing (STP), which will completely automate the process of order flow and clearing and settlement on the stock exchanges. 6. RBI has introduced the Real Time Gross Settlement system (RTGS) in 2004 on experimental basis. RTGS will allow real delivery v/s. payment which is the international norm recognized by BIS and IOSCO.

7.

To improve the governance mechanism of stock exchanges by mandating demutualisation and corporatisation of stock exchanges and to protect the interest of investors in securities market the Securities Laws (Amendment) Ordinance was promulgated on 12th October 2004. The Ordinance has since been replaced by a Bill.

LEGAL FRAMEWORK
The exigencies of the market and the flexibility of the regulators are maintained through the exercise of delegated legislation to the regulators. Under this the regulators issue notifications, circulars and guidelines which are to be compiled by the market participants. Various activities in the securities market in India are regulated in a coordinated manner by four regulators namely Department of Economic Affairs( DEA) of the Ministry of Finance, Ministry of Corporate Affairs, Securities and Exchange Board of India(SEBI) and the Reserve Bank of India( RBI). The regulatory and the supervisory framework of the securities market in India has been progressively strengthened through various legislative and administrative measures and is consistent with the best International benchmarks, such as standards prescribed by the International Organization of Securities Commissions( IOSCO).

RULES AND REGULATIONS

The Government has framed rules under the Securities Contract (Regulation) Act, SEBI act and the Depositories Act. SEBI has framed regulations under the SEBI Act and the Depositories Act for registration and regulation of all market intermediaries, for prevention of unfair trade practices, insider trading etc. Under these Acts, Government and SEBI issue notifications, guidelines and circulars, which need to be complied by the market participants. The self regulatory organizations (SROs) like stock exchanges have also laid down their own rules and regulations for market participants.

REGULATORS
The regulators ensure that the market participants behave in a desired manner so that the securities market continues to be the major source of finance for corporates and government and the interest of investors are protected. As noted earlier, the responsibility for regulating the securities market is shared by DEA, Ministry of Corporate Affairs, SEBI and RBI.

SEBI (Intermediaries) Regulations, 2008

One of the main functions of SEBI is to register and regulate the functioning of various types of intermediaries and persons associated with securities market in a manner as to ensure smooth functioning of the markets and the protection of interests of the investors. These intermediaries as detailed in the SEBI Act are: stock brokers, sub brokers, share transfer agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies, asset management companies, clearing members of a clearing corporation, trading member of a derivative segment of a stock exchange, collective investment schemes, venture capital funds, mutual funds, and any other intermediary associated with the securities market.

SEBI had issued regulations governing the registration and regulatory framework for each of these intermediaries. However, given the fact that many requirements and obligations of most intermediaries are common, SEBI has recently consolidated these requirements and issued SEBI (intermediaries) Regulations 2008. These regulations were notified on May 26, 2009. These regulations apply to all intermediaries mentioned above except foreign institutional investors, foreign venture capital investors, mutual funds, collective investment schemes and venture capital funds. The salient features of the Regulation are as under: 1. The SEBI Regulations put in place a comprehensive regulation which is applicable to all intermediaries. The common requirements such as grant of registration, general obligations, common code of conduct, common procedure for action in case of default and miscellaneous provisions are applicable for all intermediaries. 2. The registration process has been simplified. An applicant can file application in the prescribed format along with additional information as required under the relevant regulations along with the requisite fees. The existing intermediaries may, within the prescribed time, file the disclosure in the specified form. The disclosures are required to be made public by uploading the information on the website specified by SEBI. The information of commercial confidence and private information furnished to SEBI shall be treated confidential. In the event Intermediary wishes to operate in a capacity as an intermediary in a new category, such person may only file the additional shortened forms disclosing the specified requirements of the new category as per the relevant regulations. 3. The Fit and Proper criteria have been modified to make it principle based. The common conduct has been specified at one place. 4. The Registration granted to intermediaries has been made permanent unless surrendered by the intermediary or suspended or cancelled in accordance with these regulations.

5. Procedure for action in case of default and manner of suspension or cancellation of certificate has been simplified to shorten the time usually faced by the parties without compromising with the right of reasonable opportunity to be heard. Surrender of certificate has been enabled without going through lengthy procedures. 6. While common requirements will be governed by the new regulations, the intermediaries specific requirements will continue to be as per the relevant regulations applicable to individual intermediaries. The relevant regulations will be amended to provide for the specific requirements.

SEBI (Prohibition of Insider Trading) Regulations, 1992

The malpractice of Insider trading affects the innocent investors. In simple terms Insider Trading means selling or buying in securities on the basis of price sensitive unpublished information of a listed corporate which if published could lead to a fall or rise in the prices of shares of the corporate. To tackle the problems of insider trading, SEBI issued the SEBI (Insider Trading) Regulations 1992. These regulations were further made stringent through amendments in February 2002 and they were notified as the SEBI (Insider Trading) (Amendment) Regulations 2002. Price Sensitive information means any information which is related directly or indirectly to a company and which if published is likely to materially affect the price of securities of a company. It includes only such information which if published is likely to materially affect the price of securities of a company. The following is deemed to be price sensitive information: (a) (b) (c) (d) (e) (f) (g) Periodical financial results of the company Intended declaration of dividends( both interim and final) Issue of securities or buy back of securities. Any major expansion plans or execution of new projects. Amalgamation, mergers or takeovers. Disposal of the whole or substantial part of the undertaking. Significant changes in policies, plans or operations of the company.

Prohibition on Dealing, Communicating or Counseling

Under this regulation, no insider should: (a) Either on his own behalf or on behalf of any other person deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information. (b) Communicate, counsel or procure, directly or indirectly, any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive

information should not deal in securities. This is however, not applicable to any communication required in the ordinary course of business or profession or employment or under any law. The regulations require that no company should deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.

INVESTIGATION
If SEBI suspects any person of having violated the provisions of insider regulation, it may make inquiries with such person or with the stock exchange, mutual funds, other persons associated with the securities market, intermediaries and self regulatory organization in the securities market to form a prima facie opinion as to whether there is any violation of insider regulations. Where SEBI forms a prima facie opinion that it is necessary to investigate and inspect the books of accounts, either documents and records of an insider or the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self regulatory organization in the securities market, it may appoint an investigation authority for the purpose. The investigation authority has to submit its report to SEBI, after completion of investigations in accordance with the provisions of the regulations. After considering the report, SEBI is required to communicate its findings to the suspected person and seek a reply from such person. Such suspected person is required to reply to the findings within 21 days to SEBI. After receipt of the reply, SEBI may take such measures to safeguard and protect the interest of investors, securities market and for due compliance with the insider trading regulations. SEBI also has powers to appoint an auditor to investigate into the books of accounts or the affairs of the insider or the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self regulatory organization in the securities market.

Disclosures and Internal Procedure for Prevention of Insider Trading

All listed companies and organizations associated with the securities markets such as intermediaries, asset management company, trustees of mutual funds, self regulatory organizations recognized by SEBI, recognized stock exchanges, clearing house or corporations, public financial institutions and professional firms such as auditors, accountancy firms, law firms, analysts, consultants etc assisting or advising listed companies, are required to frame a code of internal procedures and conduct as per the prescribed

format provided in SEBI ( Prohibition of Insider Trading) Regulations without diluting it in any manner and ensure compliance of the same. The Regulations require certain disclosures to be made by directors, officers and substantial shareholders in listed companies. These are:

Initial Disclosure:
(a) Any person who holds more than 5% shares or voting rights in any listed company should disclose to the company in prescribed form, the number of shares or voting rights held by such person, on becoming such holder, within two working days of: The receipt of intimation of allotment of shares or The acquisition of shares or voting rights as the case may be.

(b) Any person who is a director or officer of a listed company should disclose to the company in prescribed form, the number of shares or voting rights held by such person, within two working days of becoming a director or officer of the company.

Continual Disclosure:
(a) Any person who holds more than 5% shares or voting rights in any listed company should disclose to the company in prescribed form the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below 5% , if there has been change in such holdings from the last disclosure and such change exceeds 2% of total shareholding or voting rights in the company. (b) Any person who is a director or officer of a listed company, should disclose to the company in prescribed form, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been change in such holding from the last disclosure made and the change exceeds Rs 5 lakhs in value or 25000 shares or 1% of total shareholding or voting rights, whichever is lower. The disclosure mentioned above should be made within two working days of: The receipt of intimation of allotment of shares or The acquisition or sale of shares or voting rights, as the case may be.

Disclosure by Company to Stock Exchanges:

Every listed company, within two days of receipt, should disclose to all stock exchanges on which the company is listed, the information relating to continual and initial disclosure given above. The disclosures required under this regulation may also be made through electronic filling in accordance with the system devised by the stock exchanges. Further the SEBI Act, which inter alia prescribes the penalty for insider trading (Section 15 G), was amended in 2002 to increase the penalty for insider

trading to Rs 25 crore or three times the amount of profits made out of insider trading, whichever is higher.

SEBI (Prohibition of fraudulent and unfair trade practices relating to Securities market) Regulations, 2003
The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 enable SEBI to investigate into cases of market manipulation and fraudulent and unfair trade practices. The Regulations specifically prohibit market manipulation, misleading statements to induce sale or purchase of securities, unfair trade practices relating to securities.

Prohibition of Certain Dealings in Securities

The Regulation provides that no person should directly or indirectly: (a) Buy, sell or otherwise deal in fraudulent manner. (b) Use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under. (c) Employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange. (d) Engage in any act, practice, and course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the act, rules and regulations.

Prohibition of Manipulative, Fraudulent and Unfair Trade Practices

The Regulation provides that no person should indulge in a fraudulent or an unfair trade practice in securities. Any dealing in securities is deemed to be fraudulent or an unfair trade practice if it involves fraud and may include all or any of the following: (a) Indulging in an act which creates false or misleading appearance of trading in the securities market. (b) Dealing in a security not intended to effect transfer of beneficial ownership but intended to operate only as a device to inflate, depress or cause fluctuations in the price of such security for wrongful gain or avoidance of loss. (c) Advancing or agreeing to advance any money to any person thereby inducing any other person to offer to buy any security in any issue only with the intention of securing the minimum subscription to such issue. (d) Paying, offering or agreeing to pay an offer, directly or indirectly, to any person any money or moneys worth for inducing such person for dealing in any security with the object of inflating, depressing, maintaining or causing fluctuations in the price of such security.

(e) Any act or omission amounting to manipulation of the price of a security. (f) Publishing or causing to publish or reporting or causing to report by a person dealing in securities any information which is not true or which he does not believe to be true prior to or in the course of dealing in securities. (g) Entering into a transaction in securities without intention of performing it or without intention of change in ownership of such security. (h) Selling, dealing or pledging of stolen or counterfeit security whether in physical or dematerialized form. (i) An intermediary promising a certain price in respect of buying or selling of as security to a client and waiting till a discrepancy arises in the price of such security and retaining the difference in prices as profit for himself. (j) An intermediary providing his clients with such information relating to a security as cannot be verified by the clients before their dealing in such security. (k) An advertisement that is misleading or that contains information in a distorted manner and which may influence the decision of the investors. (l) An intermediary reporting trading transactions to his clients entered into on their behalf in an inflated manner in order to increase his commission and brokerage. (m) An intermediary not disclosing to his client transactions entered into on his behalf including taking an option position. (n) Circular transactions in respect of a security entered into between intermediaries in order to increase commission to provide a false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of such security. (o) Encouraging the clients by an intermediary to deal in securities solely with the object of enhancing his brokerage or commission. (p) An intermediary predating or otherwise falsifying records such as contract notes.

(q) An intermediary buying or selling securities in advance of a substantial client order or whereby a futures or option position is taken about an impending transaction in the same or related futures or options contract. (r) Planting false or misleading news which may induce sale pr purchase of securities.

TAXATION LEGAL FRAMEWORK

INCOME TAX ACT, 1961
Some of the important definitions related to the Income Tax Act are as follows:

1. Domestic Company: It means an Indian Company or any other company which, in respect of its
income liable to tax under this act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income, as per section 2(22A). 2. Dividend: According to section 2(22) it includes, (a) Any distribution by a company of accumulated profits, whether capitalized or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company. (b) Any distribution to its shareholders by a company of debentures, debenture stock or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalized or not. (c) Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not. (d) Any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April 1933, whether such accumulated profits have been capitalized or not. (e) Any payment by the company, not being a company in which the public are substantially interested, of any sum( whether as representing a part of the assets of the company or otherwise) made after the 31st May 1987 by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares ( not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than 10% of the voting powers, or to any concern in which such shareholder is a member or a partner and in

which he has a substantial interest ( hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits. But Dividend does not include: (a) A distribution made in accordance with sub clause (c) or sub clause (d) in respect of any share issued for full cash consideration, whether the holder of the shares is not entitled in the event of liquidation to participate in the surplus assets.

(b) A distribution made in accordance with sub clause (c) or sub clause (d) in so far as such distribution is attributable to the capitalized profits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964 (and before the 1st day of April, 1965). (c) Any advance or loan made to a shareholder (or the said concern) by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company. (d) Any dividend paid by the company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub clause (e), to the extent to which it is so set off. (e) Any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956. (f) Any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company). 3. Dividend Income (Section 8): For the purposes of inclusion in the total income of an assessee: (a) Any dividend declared by a company or distributed or paid by it within the meaning of sub clause (a) or sub clause (b) or sub clause (c) or sub clause (d) or sub clause (e) of clause (22) of Section 2, should be deemed to be the income of the previous year in which it is so declared, distributed or paid as the case may be. (b) Any interim dividend should be deemed to be the income of the previous year, in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.

4. Interest on Securities ( Clause 28B of Section 2) means:

(a) Interest on any security of the Central Government or a State Government. (b) Interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act.

5. Capital Asset:
(a) Long term Capital Asset means a capital asset which is not a short term capital asset as per clause 29A of Section 2. (b) Short term Capital Asset means a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer, (Clause 42A of Section 2) twelve months in case of a share held in a company or any other security listed in a recognized stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 or a unit of a mutual fund specified under clause (23D) of section 10 or a zero coupon bond.

6. Capital Gains (Section 45): Any profits or gains arising from the transfer of a capital asset
effected in the previous year should, save as otherwise provided in sections (54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H), be chargeable to income tax under the head Capital Gains and should be deemed to be the income of the previous year in which the transfer took place. Where any person has had at any time during previous year any beneficial interest in any securities, then any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities should be chargeable to income tax as the income of beneficial owner of the previous year in which such transfer took place and should not be regarded as income of the depository who is deemed to be registered owner of securities by virtue of sub section (1) of section 10 of the Depositories Act 1996 and for the purposes of section 48 and provision to clause (42A) of section 2, the cost of acquisition and the period of holding of any securities should be determined on the basis of first-in-first-out method.

Types of Capital Gains:

Long Term Capital Gain: It means capital gain arising from the transfer of a long term capital asset. Short Term Capital Gain: It means capital gain arising from the transfer of a short term capital asset.

PAN Compulsory for Securities Transaction

The Income Tax( Eighth Amendment) Rules, 2002 made it mandatory for a person to quote permanent account numbers(PAN), issued by the Income Tax department, for Securities Transactions of over Rs 1 lakh.

Tax on Long-Term Capital Gains (Section 112):

Where the total income of the assessee includes any income, arising from the transfer of a long term capital asset, which is chargeable under the head Capital Gains, the tax payable by the assessee on the total income should be aggregate of:

1. In the case of an individual or a Hindu Undivided Family, being a resident: (a) The amount of income-tax payable on the total income as reduced by the amount of such longterm capital gains, had the total income as so reduced been his total income, and (b) The amount of income-tax calculated on such long-term capital gains at the rate of twenty percent.

2. In the case of a domestic company: (a) The amount of income tax payable on the total income as reduced by the amount of such long term gains, had the total income as so reduced been its total income, and (b) The amount of income tax calculated on such long term capital gains at the rate of twenty percent.

3. In the Case of a non-resident ( not being a company) or a foreign company: (a) The amount of income tax payable on the total income as reduced by the amount of such long term capital gains, had the total income as so reduced been its total income, and (b) The amount of income tax calculated on such long term capital gains at the rate of twenty percent.

Where the gross total income of an assessee includes any income arising from the transfer of a long term capital asset, the gross total income should be reduced by the amount of such income and the deduction should be allowed as if the gross total income as so reduced were the gross total income of the assessee. Where the total income of an assessee includes any income arising from the transfer of a long-term capital asset, the total income should be reduced by the amount of such income and the rebate under section 88 should be allowed from the income tax on the total income as so reduced.

GLOBAL ECONOMIC ENVIRONMENT 1. Role of Foreign institutional investors in Capital Market: The financial markets
have expanded and deepened rapidly over the last 10 years. The Indian capital markets have witnessed a dramatic increase in institutional activity and more specifically that of FIIs.These change in market environment has made the market more innovative and competitive enabling the issuers of securities and intermediaries to grow. In India the institutionalization of the capital markets has increased with FIIs becoming the dominant power of the free float of most blue chip Indian stocks. Institutions often trade large block of shares and institutional orders can have a major impact on market volatility. In smaller markets, institutional trades can potentially destabilize the markets. Moreover, institutions also have to design and time their trading strategies carefully so that their trades have maximum possible returns and minimum possible impact costs. Foreign Capital flows have come to be acknowledged as one of the important sources of funds for economies that would like to grow at a rate higher than what their domestic savings can support. Foreign capital flows have particularly become prominent after the advent of globalization that that has led to widespread implementation of liberalization programmes and financial reforms in various countries across the globe in the 1990s. This resulted in the integration of global financial markets. As a result, capital started flowing freely across national borders seeking out the highest rate of return. The net capital flows to developing countries which were at US dollar 86.6 billion in 1990 have seen a steady growth over time and were at US Dollar 228 billion in 2003 representing about 3.6% of the nominal gross domestic product of developing countries. Initially these capital flows were mainly in the form of syndicated bank loans but in recent years the debt flows have gradually been replaced with Foreign Direct Investment flows and portfolio flows to a great extent. Table Showing the trend of FII Activities in India Purchases Sales Net (Rs mn) (Rs mn) (Rs mn) 390,393 302,064 88,329

Year 2005

Net (US$mn) 2,012

2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994

1,856,720 944,120 464,790 517,792 747,907 364,303 138,998 189,265 157,392 66,659 92,672

1,467,070 639,535 428,498 386,510 684,211 298,630 153,797 127,192 49,356 28,122 24,761

389,650 304,585 36,292 131,284 63,697 65,672 14,799 62,073 108,036 38,538 67,912

8519.40 6,594.60 752.9 2,807.30 1,461.40 1,534.80 -338 1,746.70 3,058.20 1,191.40 2,164.80

The negative trend from 2006 onwards signifies that FIIs have been sold more than purchased in the recent trading sessions for the last 6 years. As a result net FII flows signify a negative value in crores which is almost 40000 crores in 2010. Another eye catching observation is that a substantial portion of FII Investments come in during last five months of the calendar year. In the year 2009, 63% of the total investments came in during last five months, while the figure stood at 57% for the year 2010. The main reasons for such FII selling could be attributed to the following points: 1. As the US market had slowed down due to the US Debt Crisis, US Subprime crisis and rise of crude oil prices there had been a liquidity crunch ever since as this resulted in the FIIs pumping out money from Indian and other developing markets. The major sources of FII for India are listed as follows: US-based institutions accounted for slightly 41%. UK constitutes about 20%. Western European Countries hosting nearly about 17% of the FIIs. The remaining 22% by other countries.

So a slowdown in US and overall globally as well have affected the FII flows into India adversely as US and UK are the major destinations for India to attract FIIs into the nation. 2. With the appreciation in the Japanese currency Yen, the Japanese market seemed to be more attractive in terms of investments. 3. Gold and silver prices touching their all time high and this has been lucrative investment opportunity and investors have constantly shifted from stock market to commodity market.

Investment Opportunities for FIIs:

The following financial instruments are available for FII Investments: (a) Securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India. (b) Units of Mutual Funds (c) Dated Government securities (d) Derivatives traded on a recognized stock exchange. (e) Commercial Papers

Investment limits on equity Investments:

(a) FII, on its own behalf, shall not invest in equity more than 10% of total issued capital of an Indian Company. (b) Investment on behalf of each sub-account shall not exceed 10% of the total issued capital of an Indian company. (c) For the sub-account registered under Foreign Companies/ Individual Category, the investment limit is fixed at 5% of issued capital. These limits are within overall limit of 24%/49%/or the sectoral caps as prescribed by the Government of India/Reserve Bank of India.

Investment limits on Debt Investments:

The FII investments in debt securities are governed by the policy of the Government of India. Currently for Corporate debt the investment limit is fixed at US $ 500 million.

TAXATION
The Taxation norms available to a FII are shown in the table below: Nature of Income Long term capital gains Short term capital gains Tax Rate 10% 30%

Dividend Income Interest Income

NIL 20%

Long Term Capital Gain: Capital Gain on sale of securities held for a period of more than one year. Short Term Capital Gain: Capital Gain on sale of securities held for a period of less than one year.

FIIs and Volatility

SEBI enumerates four reasons for volatility in prices concerning to FIIs.These are as follows: In as much as an increase in investment by FIIs trigger a sharp price increase, it would provide additional incentives for FIIs Investment and in the first instance encourage further purchases, so that there is tendency for correction of price increases. And when the correction begins, it would have to be led by an FII pull-out and can take extremely a sharp decline in prices. Secondly, as and when FIIs are attracted to the market by expectation of a price increase that tend to be automatically realized, the inflow of foreign capital can result in appreciation of the rupee visa a vis dollar(say). This increases the return earned in foreign exchange, when rupee assets are sold and revenue converted into dollars. As a result, the investments turn even more attractive triggering an investment spiral that would imply a sharper fall when any correction begins. Thirdly, the growing realization by the FIIs of the power they wield in what are shallow markets, encourages speculative investment aimed at pushing the market up and choosing an appropriate moment to exit. This implicit manipulation of the market if resorted to often enough would obviously imply a substantial increase in volatility. Finally, in volatile markets, domestic speculators too attempt to manipulate markets in periods of unusually high prices.

Conclusion
In recent times, there is a drastic change in the policy and regulations concerning FIIs. It shows the extent of importance accorded to FIIs. In fact, all this is a part of economic reforms. The most affected area in the economy is stock market. The fortune of investors in the stock market is often determined by the behavior of FIIs. Though there is a high degree of volatility due to investments made by FIIs, it is proved that FIIs are one of the main factors of growth of Indian Stock market. Liberalization, whether it is bane or boon, we should accept and no economy can escape from this. By taking care and by upgrading policies and regulations whenever necessary, we can escape from the negative shades of FIIs as well as liberalization.

2. Impact of ever increasing oil prices on Indian Economy: Crude Oil is one of the
most necessitated worldwide required commodities. Any slightest fluctuation in crude oil prices can have both direct and indirect influence on the economy of the countries. The volatility of crude oil prices drove many companies away and it impacts the stock market as well. Crude oil prices act like any other product cost with more variation taken place during shortage and excess supply. Any massive increase or decrease in crude oil has its impact on the condition of stock markets in throughout the world. The Stock Exchanges of every country keep a close eye on any up and downward movement of the crude oil price. India fulfills its major crude oil requirements by importing it from oil producing nations. India meets more than 80% of its requirement by importing process.

Therefore any upward and downward motion of prices is closely tracked in the domestic market place. Many times it has been recorded that prices of essential products like crude also acts as a prime driver in becoming reason of up and down movement of prices. Any fluctuation in crude oil affects the other industrial segments also. Higher Crude Oil prices imply to the higher price of energy, which in turn negatively affects other trading practices that are directly or indirectly depends on it. In the short term, price of crude oil is affected by many factors like socio and political events, status of financial markets, whereas from medium to long run it is influenced by the fundamentals of demand and supply which thus results into self price correction mechanism. There are innumerable factors which influence the price movement of crude oil in throughout the world. Like methods and technology using for increase the oil production, storing up of crude oil, changes introduced in tax policy, social and political issues, demand & supply etc. The crude oil prices have been buffeted by many factors, which are summarized as below:

Production: The OPEC Nations are the major producer of worlds crude oil. Therefore every
policy made by such countries related to crude oil prices has their influence on crude oil prices. Any decision taken by OPEC nations for increasing or decreasing production of crude oil impacts the price level of crude oil in International commodity markets. Undoubtedly the biggest contributor to the high oil prices is the stalled out oil supply. At this point, the interaction between oil demand and oil supply does not work in the way most people expect it would. Even if the price of oil rises, world oil production doesnt increase by very much, if at all.

In the words of economists, world oil supply is relatively inelastic. This is true, even though the oil supply shown in the figure is what is sometimes called All liquids, so includes substitutes for crude oil, such as biofuels,natural gas liquids, refinery gain and any fuels from coal to liquid and gas to liquid processes. These substitutes are not growing by enough to make up for the shortfall in the crude oil growth. If we compare recent oil production with that in the 1980s and 1990s, we see that about 2005, growth in world oil supply suddenly slowed down.

Between 1983 and 2005, World oil supply rose by 1.64% per year. If world oil supply had continued to rise at that rate, oil production would have been about 5 million barrels a day

higher in 2011 than it actually was. The fact that oil production has remained relatively flat since 2005 is the primary reason oil prices have continued to rise, except during 2008-2009 recessions (This recession was to a significant extent caused by high oil prices). Thus the amount of oil shortfall is huge.

Natural Causes: In previous years, global community has witnessed many events which in
turns have volatility effects on the price level of crude oil. Like hurricane Katrina and other types of tropical cyclones have hit the major portion of globe, which as a result has driven the crude oil prices to reach at its peak.

Inventory: In throughout the world, oil producers and consumers get stock their crude oil for
the future requirements. This gives rise to speculation on price expectations and sale chances in case any unexpected event takes place during supply and demand equations. Any upward or downward movement in inventory level shoots up volatility in price index of crude oil, which generates lot of changing movement in Sensex. One such example worthwhile discussing is Iran.

Iran produces about 4.2 million barrels a day, and consumes about 1.8 million barrels a day, leaving about 2.4 million barrels a day for exports. Of this 2,156,000 is reported by the EIA to be exports of crude oil, the remainder is exported as refined products.

According to EIA, Irans top export destinations are China, Japan and India. The EU and Turkey are said to import 650,000 barrels of oil a day, with one source in turkey accounting for 200,000 barrels of the total. Besides concern about exports, there is also concern that oil which passes through the Strait of Hormuz may be delayed. Currently 17 million barrels a day of oil passes through the Strait of Hormuz, with 85% of these exports headed for Asian destinations. While other routes are available, there would be delays and higher cost involved. Even if the delays do not directly affect the US and EU, there would likely be indirect impacts on world markets. The World clearly cannot get along without 2.4 million barrels a day of exports from Iran. In a world where oil production is not rising by much, any loss of production is a problem because of the

adverse impact high oil prices have on economies of oil importing countries, including those of EU, Japan and the United States. Any loss of production also leaves us more vulnerable to disruptions if another oil exporter suddenly faces difficulties.

Demand & Supply: With a sharp rise in economic demand, requirement of crude oil is
increasing to manifold in context to limited supply.

The Impact Analysis:

1. The Import Bill: Since we are the net importer of oil, the increasing import bill will widen our
trade balance, defined as exports minus imports, which has been perpetually running at a deficit and possibly wipe out our current account surplus, which is Trade Balance minus Net Invisibles, which has turned from deficit into surplus over the last few years. Higher trade balance will adversely impact the fiscal deficit, which in turn will impact the interest rates. Hence the stock market is impacted.

Indian imports were worth 39782 million USD in February 2012. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Main import partners are European Union, Saudi Arabia and United States.

2. Inflation: Since petroleum products are key constituents of Wholesale and Consumer Price
Inflation index, higher import bill directly or indirectly impact the rupee, while inflation impacts interest rates and hence even the rupee. These factors obviously affect our GDP growth rates.

All these factors individually and collectively could have a negative impact on the stock market.

CONCLUSION
For the last few years it has been seen time and again that the increase in the price of crude oil had a direct impact on the stock market. Though it is hard to imagine why it is a fact that a rise in the oil price has negative impact on the stock prices at the stock exchanges all over the world. The main reason behind this is the fear of the investors that the profit margins of the companies will decrease because of the increase in oil prices. As the increase in oil price directly increases the operational cost, fuel cost, transportation cost of the companies, it is quite natural that the profit margins of these companies will decrease. This is the reason that the buyers become susceptible about the future of the companies that are hugely dependent on oil. This uncertainty restricts the buyers to invest in these companies and as a result the price of the stocks falls that ultimately has a negative effect on the overall market scenario. But this phase is temporary as the companies adjust in the price level to make up for the increased price in the oil and maintain the profit margin. But all said and done this fear for the fall in the profit margin is not practical according to the theory. In practice the effect of the price increase in the profit margin of the companies take time. Before that could actually happen the companies take adequate measures to avoid the loss. Therefore the influence of the rise in the price of crude oil on the stock market is triggered of the panic of investors rather than actual impact. But still it is always wise to wait and watch after a rise in the oil prices takes place to make investments.

3. Slowdown in the number of sectors has further slowed down the economy and stock market: The Centre revealed on February 29, 2012 that Indias
economic growth slipped to 6.1% during the third quarter of the current fiscal, as against a healthy 8.3% expansion registered in the comparable quarter a year ago. This new development underscored the possibility of an overall economic slowdown owing to sagging investor confidence due to high interest rates, continued spike in International oil prices and slackening demand for goods at home and abroad.

The October-December 2011-12 gross domestic product (GDP) growth is the lowest in over two years and is lower than the 6.9% expansion officially projected for the entire financial year. The sectors mainly responsible for the sharp deceleration in the year-onyear GDP growth were the major ones including manufacturing, mining and agriculture. As per the third quarter growth figures released by the Central Statistical Organization (CSO), the manufacturing sector saw a sharp deceleration in growth to a mere 0.4% in October-December 2011-12 from 7.8% witnessed during the same quarter of 2010-11. The performance of the mining sector was even worse. It witnessed a contraction in output by 3.1% as compared to a growth of 6.1% achieved in the same three months of 2010-11. Also, during the quarter under consideration, the farm sector grew at a slow 2.7% as against a robust 11% expansion in October-December 201011. As a consequence of such poor overall figures, the cumulative GDP growth for the first nine months (April-December) of the 2011-12 financial year also slipped to 6.9% from 8.1% clocked during the same period of 2010-11. Apart from manufacturing, mining and agriculture, the GDP data for the third quarter showed that the other sectors of the economy also witnessed deceleration in expansion. Growth in the construction sector slowed to 7.2% during October-December 2011-12 from 8.7% during the same period a year ago. The services sector growth also slipped to 9.9% from 11.2% expansion during the same period of the previous fiscal. Only the segment comprising electricity, gas and water posted a healthy growth at 9% during the quarter under review, compared to a poor 3.8% increase in the same period of the previous fiscal.

Core Sector growth down to 0.5% in January 2012

Figures made available by the Centre on February 28,2012 revealed that the core sector put up a dismal show in January 2012, with its output expanding by a mere 0.5% as compared to a healthy 6.4% in the same month a year ago. In the previous month i.e. December 2011, the sector had posted a growth of 3.1%. The January 2011 figures betrayed clear signs of a slowdown, considering the fact that eight segments constitute the core of the manufacturing sector and account for a weight of 37.90% in the index of industrial production (IIP). Marked contraction in the growth in finished steel and the three petroleum segments-crude oil, petroleum refinery products and natural gas was primarily responsible for the pull down in the core

Sector growth. The other four segments electricity, cement, coal and fertilizer managed to stay in the positive territory. As a consequence of the overall poor performance in January 2012, the core sectors cumulative growth during the first 10 months (April-January) of the current (2011-12) fiscal slipped to 4.1 percent from 5.7 percent clocked during the same period of the previous (2010-11) financial year. As per the official data, crude oil production contracted by 2 percent in January 2012 as compared to a robust growth of 10.8 percent in the same month of 2011. The worst performance was by the natural gas segment, with its production contracted further by 8.9 percent during the month under consideration as compared to a negative growth of 6.3 percent in January 2011. The Petroleum refinery segment also strayed into negative territory with an output contraction of 4.6 percent as compared to a robust growth of 8.7 percent. Steel also witnessed a negative production growth of 2.9 percent in January 2012 as against an expansion of 8.7 percent in January 2011.

The other four segments reflected a positive growth trend. Coal output went up by 7.5 percent from (-) 1.3 percent year on year. Fertilizer output also rose, but at a slower pace of 4 percent in January 2012 as compared to 5.9 percent in the same month a year ago. Cement output increased by 10.6 percent year on year as compared to a growth of 1.8 percent. Electricity generation barely managed to remain in a positive territory with a growth of 2.4 percent in January 2012 as compared to 9.7 percent rise in January 2011.

4. Impact of Global Recession or slowdown on Indian Economy:

The Present

economic slowdown results in a huge loss to the business and ultimately reduction of job. The Banks are facing huge losses due to sub-prime crisis. The Big banks like Lehman Brothers, Merrill Lynch etc have gone bankrupt. India is facing slowdown not due to indigenous reasons but because of USA and European countries since Indian Economy is more dependent on these countries. The following table depicts Indias major export and import partners.

As we can see from the table that the largest importing partner for India is European nations as it constitutes nearly 14% of total imports of India followed by China. And again European nations head the list of largest exporters as far as exports are concerned by India with nearly 19% of total export trade taking place with these nations. If we see the overall trade volume exchanged by India, undoubtedly European Nations constitute the highest percentage in that as well with 15.6% followed by china and United States. Thus the sub-prime crisis and US recession had an impact on Indian economy as well and is one of the important reasons for slowdown in Indian economy. Due to the recessionary trends in the international market, Indian companies export orders are either cancelled or the export amount is reduced to a significant limit due to which some of the companies

who cannot meet the situation have suffered from loss. Moreover the financial conditions of many banks are in a quandary. The Banks are providing loans with lot of precautions. It also had an impact on the unemployment in the economy which is rising all the time.

MONETARY POLICY
Monetary Policy is a tool used by the Central Bank to manage money supply in the economy in order to achieve a desirable growth. Its a policy regarding cost, supply and availability of money in the economy.

The policy Stance for 2012-13

After raising the policy rate by 375 basis points during March 2010- October 2011 to contain inflation and anchor inflation expectations, The Reserve Bank of India (RBI) paused in its mid quarter review of December 2011. Subsequent growth- inflation dynamics prompted the central bank to indicate that no further tightening was required and that the future actions would be towards lowering the rates. Against the backdrop of global and domestic macro-economic conditions, outlook and risks, the policy stance for 2012-13 has been guided by two major considerations. Firstly growth decelerated significantly to 6.1% in quarter 3 of 2011-12, though it is expected to have recovered moderately in

Quarter 4. Based on the current assessment, the economy is clearly operating below its post-crisis trend. Secondly headline WPI Inflation as well as non-food manufactured products inflation moderated significantly by March 2012. During December- January, inflation softened on account of a decline in food prices, however in the following two months, inflation softening was driven largely by moderation in the core components reflecting a slowdown in demand. Against this backdrop, the stance of monetary policy is intended to:

Adjust policy rates to levels consistent with the current growth moderation. Guard against risks of demand-led inflationary pressures re-emerging. Provide a greater liquidity cushion to the financial system.

MONETARY MEASURES
On the basis of the current assessment and in line with the policy stance, The Reserve Bank of India announced the following measures:

1. Repo and Reverse Repo Rate: It is the rate which is used to raise short term capital. A form of
short term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day. For a party selling the security, it is a repo and for the party on the other end of the transaction, it is a reverse repo rate. Currently it has been decided to reduce the repo rate under the liquidity adjustment facility by 50 basis points from 8.5% to 8% with immediate effect. The Reverse Repo rate under the Liquidity Adjustment Facility, determined with a spread of 100 basis points below the repo rate, stands adjusted to 7% with immediate effect. 2. Marginal Standing Facility: Marginal Standing Facility (MSF) rate is the rate at which banks can borrow overnight from RBI. In order to provide greater liquidity cushion, it has been decided to raise the borrowing limit of scheduled commercial banks under MSF from 1% to 2% of their net demand and time liabilities outstanding at the end of second preceding fortnight with immediate effect. The MSF Rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 9% with immediate effect. 3. Bank Rate: Bank rate is the interest rate at which RBI lends money to domestic banks. The Bank rate stands adjusted to 9% with immediate effect. 4. Cash Reserve Ratio: Cash reserve ratio is the portion of depositors funds that a commercial bank needs to keep with Central Bank. Currently it stands at 4.75% of their net demand and time liabilities. In my opinion this is a good gesture given by RBI by shifting its stance from a tighter monetary policy to liberal credit policy as they reduce the repo, reverse repo and bank rate by 50 basis points. So now it becomes cheaper for the Commercial Banks to borrow money from Central Bank and as a result can afford to reduce the rate at which customers borrow money from them. Moreover banks offer loans such as home loans and auto loans at an interest rate which is directly proportional to Repo Rate. Interest Rate for a common man is the Repo Rate plus the rate of interest at which he took loan from the bank. So EMI for the same will come down as a result of reduction in Repo Rate by RBI. Its a common saying If you want to succeed, get ready to face the challenges that come your way. Indian economy is no different as it is surrounded by challenges such as high crude oil prices( touching $ 132 per barrel now globally) leading to high fiscal and current account deficits, slower than budgeted growth, slowing European and Chinese Economies and below trend growth in the US would keep pressure on Indias economic growth. So it may be difficult to assume that a cut in the repo and the

reverse repo rate will make such a big difference to the current scenario. But Where there is a will, there is a way. As Indias GDP grew at a rapid pace during the golden era of 2003-07, unfortunately the oil prices also increased 5 times( From $ 25 in 2003 to $ 125 per barrel) which has not done good to the growing fiscal deficit of the economy. But with projected growth rate being 7.3% in the current fiscal year, India still has the potential of growing constantly at this pace for the next 10 years and with oil prices not expected to grow at the same pace, Indian Economy has the great chance of narrowing down the current and fiscal deficit in the coming years and all this can happen if India has a strong domestic demand and growth prospects in place. Though seems like a farfetched argument but Indian Economy has the ammunition to meet these targets and in this context RBI has given a positive sign to the Indian investors by reducing the repo and reverse repo rate by 50 bps. So how RBI works out its credit policy in future will be an interesting thing to watch out for and at the same time how Government cuts its borrowing debt and increasing expenditure will be influencing the investors and their confidence in the credit policy adopted by RBI. Among the midst of things, I personally believe its a much needed step taken by RBI considering the present scenario.

Factors Contributing to the Growth of Capital Market in India:

1. Establishment of development Banks and Industrial financing institutions: With a view
to providing long-term funds to Industry, the Government set up the Industrial Finance Corporation of India (IFCI) in 1948 i.e. soon after the Independence. This was followed by the setting up of the number of other development banks and financial institutions like the Industrial Credit and Investment Corporation of India (ICICI) in 1955, Industrial Development Bank of India (IDBI) in 1964, Industrial Reconstruction Corporation of India (IRCI) in 1971, various State Financial Corporations (SFCs) at the State Level, Unit Trust Of India (UTI) in 1964, State Industrial Development Corporations, Life Insurance Corporations of India etc. In addition, 14 major commercial banks were nationalized in 1969. Growing Public Confidence: The early post-liberalization phase witnessed increasing interest in the stock markets. The small investor who earlier shyed away from the securities market and trusted the traditional modes of investment (deposits in Commercial Banks and post offices) showed market preference in favor of shares and debentures. As a result, public issues of most of the good companies were over-subscribed many times. Increasing awareness of investment Opportunities: The last few years have witnessed increasing awareness of investment opportunities among the general public. Business newspapers and financial journals (the economic Times, the Financial Express, Business Line, Business Standard, Business India, Business Today, Business World, Money Outlook, etc) have made the people increasingly aware of new long term investment opportunities in the securities market. Setting Up of SEBI: The Securities and Exchange Board of India (SEBI) was set up in 1988 and was given statutory recognition in 1992. Among other things, the Board has been mandated to create an environment which would facilitate mobilization of adequate resources through the securities market and its efficient allocation. Credit Rating Agencies: There are three credit rating agencies operating in India at present CRISIL, ICRA and CARE. CRISIL (Credit Rating Information Services of India limited) was set up in 1988, ICRA Ltd (The Investment Information and Credit Rating Agency of India limited) was set up in 1991 and CARE (Credit Analysis and Research Limited) was set up in 1993.

2.

3.

4.

5.

COMPANY ANALYSIS
The secondary market is a market where existing securities are purchased and sold. Stock market represents the secondary market where existing securities are traded. Stock exchange provides an organized mechanism for purchase and sale of existing securities. By now, we have 23 stock approved stock exchanges in our country. Despite the fact that unorganized stock market existed in Calcutta since 1830, the first organized stock exchange was set up at Bombay in 1877 under the name of Native Stock and Stock Brokers Association. The next stock exchange which emerged in the country was Ahmadabad Share and Stock Brokers Association which was founded in 1894. The third Stock Exchange was set up at Calcutta in the year 1908. Though some more stock exchanges were set up before Independence but there was no All India Legislation to regulate their working. Every Stock Exchange followed its own method of working. To rectify this situation and to regulate the working of stock exchanges in the country, The Securities Contract Act was passed in 1956. There were only nine recognized stock exchanges in the country uptil 1981-82.

ORGANISATION AND GROWTH OF STOCK EXCHANGES

Stock Exchanges in India are organized in any of the following forms: Voluntary, non-profit making associations, e.g. Bombay, Ahmadabad and Indore. Public limited Companies such as Calcutta, Delhi and Bangalore stock exchanges. Company limited by guarantee, e.g. Hyderabad and Madras Stock Exchanges.

Only the securities which are listed are traded on the stock exchanges in India. A company can list, delist and relist its securities in the stock exchange by paying the stipulated fees. Transactions on Stock exchanges have been carried either on cash basis or on carry over basis. Some exchanges like Ahmadabad and Madras have their own clearing houses. The growth of Stock Exchanges in India has been linked with the growth of corporate sector. We can study the growth of stock exchanges in terms of number of recognized stock exchanges, the number of listed firms, market capitalization and total capitalisation in the following table.

GROWTH PATTERN OF THE INDIAN STOCK MARKET Year 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 Number of Exchanges 9 9 9 11 12 13 14 15 15 15 19 19 21 22 23 Listed Firms total( Rs/ mn) 992 Na Na 1161 1295 1529 1911 2095 2240 2275 2247 2471 2601 2861 3585 Market cap (Rs/ mn) 54210 Na Na 97960 102190 207380 216360 259370 445190 545600 652060 908360 3233630 2109520 3984320 Total (Rs/mn) 22830 24760 68510 43570 24880 47290 74960 13910 79130 205630 293860 360120 717770 456960 845360 Daily turnover 112.5 131.0 384.9 226.9 130.0 235.1 371.5 671.1 389.8 974.5 1348.0 1885.4 3323.0 2380.0 3877.8

The above table shows that stock exchanges recognized by the government increased from just 9 in 1981-82 to 23 at the end of 1993-94. Market capitalization which was just Rs 54 billion in 1979-80 had gone upto Rs 3984 billion at the end of the financial year 1993-94. The total number of companies registered with all exchanges put together has also increased from just 992 in 1979-80 to 3585 by the end of 1993-94 and upto 7000 by the end of Aug 1994. Further in terms of paid up capital, listed companies constitute major portion of the total paid up capital of the non-government corporate sector. Another analysis of the data available for stock exchanges in our country indicates that four of the stock exchanges in Bombay, Calcutta, Delhi and Ahmadabad account for almost 90% of the overall business of the stock exchanges. Another indicator to gauge the growth of stock exchange activities could be the volume of turnover of stock exchanges. It had increased from Rs 22830 mn to Rs 845360 mn in 1993-94. We can find from the table that there is a sudden increase in the stock market activity from the year 1991-92 when the new government in India adopted the New Industrial Policy coupled with liberalization of economy. These developments in the stock exchange activity have been on account of increases in the primary market. The total amount raised through the securities market had gone upto Rs 216 billion in 1993-94 from just Rs 2 billion in 1980.

RECENT DEVELOPMENTS IN THE SECONDARY MARKETS

Despite the pace of capital market-reforms, the bear phase in the secondary markets which had started during 1994-95 continued during the year 1996-97. While equity prices have been declining in 1996-97, the total turnover on the Mumbai and National Stock Exchanges till December 1996 was Rs 283699 crore over double the level of 1995-96 and over five times the combined turnover of Rs 50093 crore in 1995-96 till December 1995. Though the market registered an all time peak in 1997-98 when the BSE sensitive index climbed to 4306 in July, the index fell thereafter but consistently stayed above 3500 before declining to 3224 in January 1998. The East Asian Crisis caused jitters in the world capital markets. The Indian capital markets were not affected by the East Asian Crisis, except for short periods of volatility. Another important feature was that 98.8% of the total all India turnovers on the exchanges had shifted to on-line screen based trading. Measures taken to boost investor interest in the secondary segment of the market during 199899 include the Companies (Amendment) Ordinance and the framing of SEBI Regulations enabling companies to resort to buy back of their shares, requirement to publish unaudited results by listed companies on quarterly basis, amendment of SEBI Takeover Regulations, rolling settlement in respect of Demat securities and stringent margin requirements to curb excess volatility in share prices. Unlike in 1998-99 movement in share prices in the financial year 1999-2000 reflected a prolonged uptrend. The phenomenal spurt in information technology(IT) stocks witnessed in leading markets abroad was mirrored in the Indian market, and contributed significantly to stock market buouancy.Though the stock market has not been free from price volatility, the strong margin system and other risk containment measures could ensure the safety of the market and payment system. The year 1999-2000 has been characterized by substantial increase in market capitalization also. As per BSE estimates, market capitalization increased by about 65% from Rs 488229 crore in April 1999 to Rs 803353 crore in December 1999. As per NSE estimates, market capitalization increased by 92% from Rs 445380 crore to Rs 852985 crores during the same period. There is growing evidence about increasing participation in the securities markets. The number of accounts at NSDL which is the best measure of the number of participants in the market, had varied between 3.7 to 3.8 million in 2001 and 2002 respectively. This grew by 21% and then 29% in the following two years, to reach roughly 6 million as of end 2004 and 7.27 million in 2005. Particulars Number of NSDL Accounts Avg trade Size(rupees): NSE Spot BSE Spot NSE Derivatives 2001 3658098 2002 3813336 2003 4612884 2004 5969095 2005 7276300 2006 NA

40509 35783 285983

26703 22485 300344

26993 22782 425077

27715 23984 488790

24293 13689 501946

25657 29574 635241

The average trade size on the NSE and BSE spot markets in 2004 was Rs 27715 and Rs 23984 respectively which declined to Rs 24293 and Rs 13,689 respectively in 2005. This highlights the domination of individual investors in price discovery. The average trade size at the NSE derivatives segments rose significantly from 2001 to 2005. However the value as of 2005 of roughly Rs 5 lakhs remained accessible to a large number of households, given that this trade size requires collateral of roughly Rs 1 lakhs. The uptrend in the Secondary market continued in 2006-07 with BSE Sensex and NSE Nifty closing above 14000 and 4000 marks for the first time respectively on January 3, 2007. The market activity expanded further during 2007-08 with BSE and NSE indices scaling new peaks of 21000 and 6300 respectively in January 2008. However, the indices declined subsequently reflecting concerns on global developments.

Reforms in Indian Securities Markets:

Over a period, the Indian Securities market has undergone remarkable changes and grown exponentially, particularly in terms of resource mobilization, intermediaries, the number of listed stocks, market capitalization, and turnover and investor population. The following points list the principal reform measures undertaken since 1992.

1. Creation of Market Regulator: Securities and Exchange Board of India (SEBI), the Securities
market regulator in India, was established under SEBI Act 1992, with the main objective and responsibility for protecting the interests of investors in securities, promoting the development of securities market and regulating the securities market. 2. Screen Based Trading: Prior to setting up of NSE, the trading on stock exchanges in India was based on an open outcry system. The system was inefficient and time consuming because of its inability to provide immediate matching or recording of trades. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide on-line fully automated screen based trading system (SBTS) on the Capital Market Segment on November 3, 1994. 3. Reduction of Trading Cycle: Earlier, the trading cycle for stocks, based on the type of securities, used to vary between 14 days to 30 days and the settlement involved another fortnight. The Exchanges however continued to have different weekly trading cycles, which enabled shifting of positions from one Exchange to another. It was made mandatory for all Exchanges to follow a uniform weekly trading cycle in respect of scrips not under rolling settlement. In December 2001, all scrips were moved to rolling settlement and the settlement period was reduced progressively from T+5 to T+3 days. From April 2003 onwards, T+2 days settlement cycle is being followed. 4. Equity Derivatives Trading: In order to assist market participants in managing risks better through hedging, speculation and arbitrage, SC(R) Act was amended in 1995 to lift the ban on options in securities. Trading in derivatives, however took off in2000 with index futures after

suitable legal and regulatory framework was put in place. The Market presently offers index futures, index options, single stock futures and single stock options. 5. Demutualization: Historically, Stock Exchanges were owned, controlled and managed by the brokers. In case of disputes, integrity of the stock exchange suffered. NSE however was set up with a pure demutualised governance structure, having ownership, management and trading with three different sets of people. Currently, all the stock exchanges in India have a demutualised set up. 6. Dematerialization: As the old settlement system was inefficient due to the time lag for settlement and the physical movement of paper based securities so to obviate these problems, The Depositories Act, 1996 was passed to provide for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed and accuracy. There are two depositories in India i.e. NSDL and CDSL. They have been set up to provide instantaneous electronic transfer of securities. Demat (Dematerialized) settlement has eliminated the bad deliveries and associated problems. To prevent physical certificates from sneaking into circulation, it has been made mandatory for all newly issued securities to be compulsorily traded in dematerialized form. Now, the Public listed companies make IPO of any security for Rs. 10 crore or more have to make an IPO only in dematerialized form. 7. Clearing Corporation: The anonymous electronic order book ushered in by the NSE did not permit members to assess credit risk of the counter-party and thus necessitated some innovation in this area. To address the concern, NSE had set up the first clearing corporation i.e. National Securities Clearing Corporation Ltd. (NSCCL), which commenced its operations in April 1996.

8. Investor Protection: In order to protect the interest of the investors and promote awareness,
The Central Government (Ministry of Corporate Affairs) established the Investor Education and Protection Fund (IEPF) in October 2001. With the similar objectives, the Exchanges and SEBI also maintain Investor protection funds to take care of investor claims. SEBI and the stock exchanges have also set up investor grievance for redress of investor grievances. All these agencies and investor associations also organize investor education and awareness programmes. 9. Globalization: Indian Companies have been permitted to raise resources overseas through issue of ADRs, GDRs, FCCBs and ECBs. Further FIIs have been permitted to invest in all types of securities, including government securities and tap the domestic market. The investments by FIIs enjoy full capital account convertibility. They can invest in a company under portfolio investment route upto 24% of the paid up capital of the company. This can be increased upto the sectoral cap/ statutory ceiling, as applicable to the Indian Companies concerned, by passing a resolution of its Board of Directors followed by a special resolution to that effect by its general body. The Indian Stock Exchanges have been permitted to set up trading terminals abroad. The Trading platform of Indian Exchanges is now accessible through the internet from anywhere in the world. RBI permitted two-way fungibility for ADRs/ GDRs, which means that the investors (Foreign Institutional or Domestic) who holds ADRs/ GDRs can cancel them with the depository and sell the underlying shares in the market.

10. Launch of India VIX: Volatility Index is a measure of markets expectation of volatility over the
near term. It measures the amount by which an underlying index is expected to fluctuate in the near term, based on the order book of the underlying index options. Indias first volatility index, India VIX (based on the Nifty 50 Index Option Prices) was launched by NSE in April 2008. 11. Direct Market Access: In April 2008, SEBI allowed the direct market access (DMA) facility to the institutional investors. DMA allows brokers to offer their respective clients, direct access to the Exchange trading system through the brokers infrastructure without manual intervention by the broker.

12. Launch of securities Lending & Borrowing Scheme: In April 2008, the Securities Lending &
Borrowing mechanism was allowed. It allows market participants to take short positions effectively with less cost.

13. Launch of Currency Futures: On August 29, 2008 NSE launched trading in currency future
contracts in the USD-INR pair for the first time in India. Trading in other currency pairs like EuroINR, Pound Sterling-INR and Japanese Yen was further made available for trading in March 2010. 14. ASBA: Application Supported by Blocked Amount (ASBA) is a major primary market reform. It enables investors to apply for IPOs/FPOs and rights issue without making a payment. Instead, the amount is blocked in Investors own account and only an amount proportionate to the shares allotted goes out when allotment is finalized. 15. Launch of Interest Rate Futures: On August 31, 2009, futures on interest rate were launched on the National Stock Exchange. 16. Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009: In August 2009, the SEBI issued Issue of Capital and Disclosure Requirements (ICDR) Regulations 2009, replacing the Disclosure and Investor Protection (DIP) Guidelines 2000. ICDR Regulations would govern all disclosure norms regarding issue of securities.

Trading In Stock Exchange

Introduction:
In the past, the trading on stock exchanges in India was based on open outcry system. Under the system, brokers assemble at a central location usually the exchange trading ring, and trade with each other. This was time consuming, inefficient and imposed limits on trading volumes and trading hours. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide online; fully automated screen based trading system (SBTS). Under this system a trading member can punch into the computer the number of securities and the prices at which he would like to transact. The Transaction is executed as soon as it finds a matching sell or buys order from a counter party. This system was readily accepted by market participants and in the very first year of its operation, NSE became the leading stock exchange in the country. Technology has been used to carry the trading platform from the trading hall of stock exchanges to the premises of brokers. NSE carried the trading platform further to the PCs at the residence of investors through the internet. This made a huge difference in terms of equal access to investors in a geographically vast country like India. NSE has a main computer which is connected through Very Small Aperture Terminal (VSAT) installed at NSE office. The main computer runs on a fault tolerant STRATUS mainframe computer at the Exchange. Brokers have terminals installed at their premises which are connected through VSATs/ leased lines/modems.

Advantages of the Screen Based Trading System (SBTS):

1. It electronically matches orders on a strict price/time priority and hence cuts down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. 2. It allows faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. 3. It enables market participants, irrespective of geographical locations to trade with one another simultaneously improving the depth and liquidity of the market. 4. It provides full anonymity by accepting orders big or small from members without revealing their identity, thus providing equal access to everybody. 5. It also provides a perfect audit trail which helps to resolve disputes by logging in the trade execution process in entirety.

Trading Network
An investor informs a broker to place an order on his behalf. The broker enters the order through his personal computer, which runs under Windows NT and sends a signal to the Satellite via VSAT/leased line/modem. The signal is directed to the mainframe computer at NSE via VSAT at NSEs office. A message relating to the order activity is broadcast to the respective member. The Order Confirmation message is immediately displayed on the PC of the broker. This order matches with the existing passive orders otherwise it waits for the active orders to enter the system. On order matching a message is broadcast to the respective member. The Trading System operates on a strict price time priority. All orders received on the system are sorted with the best priced order getting the first priority for matching i.e. the best buy orders match with the best sell order. Similar priced orders are sorted on time priority basis, i.e. the one that comes in early gets priority over the later one. Orders are matched automatically by the computer keeping the system transparent, objective and fair. Where an order does not find a match it remains in the system and is displayed to the whole market till a fresh order comes in or the earlier order is cancelled or modified. The trading system provides tremendous flexibility to the users in terms of kinds of orders that can be placed on the system. Several time-related (immediate or cancel), price related (buy/sell limit and stop loss orders) or volume related (disclosed quantity) conditions can be easily built into an order. The Trading system also provides complete market information online. The market screen at any point of time provides complete information on total order depth in a security, the high and the low, the last traded price etc. Investors can also know the fate of the orders almost as soon as they are placed with the trading members. Thus, the National Exchange for Automated Trading (NEAT) system provides an Open Electronic Consolidated Limit Order Book (OECLOB). Limit Orders are orders to buy or sell shares at a stated quantity and price. If the price-quantity conditions do not match, the limit order will not be executed. The term limit order book refers to the fact that only limit orders are stored in the book and all market orders are crossed against the limit orders sitting in the book. Since the order book is visible to all the market participants, it is termed as Open Book.

Ludhiana Stock Exchange:

The Ludhiana Stock Exchange Limited( LSE) was established in 1981 by SP Oswal of Vardhman Group and B.M. Munjal of Hero Group and other leading industrial luminaries to fulfill a vital need of having a Stock exchange in the region of Punjab, Himachal Pradesh, Jammu& Kashmir and Union territory of Chandigarh. Since its inception, the Stock exchange has grown phenomenally. The Stock Exchange has played an important role in channelizing savings into capital for the various industrial and commercial units of the state of Punjab and other parts of the country. The Exchange has facilitated the mobilization of funds by entrepreneurs from the public and thereby contributed in the overall, economic, industrial and social development of the state under its jurisdiction. Ludhiana Stock Exchange is one of the leading Regional Stock Exchanges and has been in the forefront of other stock exchanges in every sphere, whether it is formation of subsidiary for providing the platform of trading to investors, for brokers etc in the era of Screen Based trading introduced by national stock exchange and Bombay Stock exchange, entering into the field of Commodities trading or imparting education to the Public at large by way of starting Certificate Programmes in Capital Market. The vision and mission of Stock Exchange is: Reaching small investors by providing services relating to Capital Market including Trading Depository Operations etc and creating mass awareness by way of education and training in the field of capital market. To create educated investors and fulfilling the gap of skilled workforce in the domain of capital market. Further the Exchange has 295 members out of which 171 are registered with National Stock Exchange as sub-brokers and 124 with Bombay Stock Exchange as sub-brokers through our subsidiary. At present, Ludhiana Stock Exchange has 324 listed companies, out of which 211 are regional and 113 are nonregional. The Total listed capital of aforesaid companies is Rs 3063.56 crores approximately. The market capitalization of the above said companies is more than Rs 1890.53 crores. The Stock Exchange is covering the vast investor base through the listing of above said companies, which are situated in the region comprising of Punjab, Himachal Pradesh, Jammu& Kashmir and Chandigarh. Ludhiana Stock Exchange has facilitated the capital generation for agro-based industries as Punjab is a agricultural led region. It will continue to do so, once it gets approval for a tie up with bigger Exchanges for commencing trading operations.

Infrastructure and Asset Base at Ludhiana Stock Exchange:

The Exchange building is situated at Feroze Gandhi Market, Ferozepur, Ludhiana. It is a six storeyed building, which is centrally air-conditioned. The building has 262 rooms, which are located on various floors ranging from second to fifth. The first floor of the building houses, the administrative houses and rooms from second to fifth floors have been leased out to brokers. Investor service centre is also located at first floor which also has a well equipped library and view terminals to provide live rates of NSE and BSE to investors. The Exchange also has an additional plot of land measuring 2333 sq yards in the prime location of city to enhance its infrastructure and source of income.

Strengths of LSE Group:

1. LSE Brand is popular among masses and hence the brand image of LSE can be easily capitalized. 2. LSE have requisite infrastructure for the Capital Market activities which includes a multistoreyed centrally air conditioned building situated in the financial hub of the city i.e. Feroze Gandhi Market.

3. LSE have well experienced staff handling operations of Stock Exchange. 4. LSE have competent board and professional management. 5. LSE have much needed networking of sub-brokers in the entire region, who are having rich experience in Stock market operations for last 31 years.

6. LSE have more than 46000 clients spread across Punjab, Himachal Pradesh, Jammu& Kashmir and adjoining areas of Haryana and Rajasthan. 7. The Turnover of the subsidiary i.e. LSE Securities Ltd is the highest among all subsidiaries of Regional Stock Exchanges in India.

Formation of subsidiary company- LSE Securities Limited:

Due to the nationwide reach of bigger stock exchanges, the trading volume at Ludhiana Stock Exchange declined and ultimately the trading stopped in February 2002 but the Stock Exchange converted the threat of bigger exchanges into opportunities and acquired the corporate membership of these exchanges through its subsidiary company i.e. LSE Securities Ltd. It has now been providing trading platforms of bigger stock exchanges to the Investors of the region. The vast network of Brokers of the Exchange is servicing millions of investors. The subsidiary company is also providing depository services in the State of Punjab and Himachal Pradesh. The growth of the subsidiary is swift and it has been providing range of services to the public at large such as Trading, Depository, IPO bidding collection centre etc. The Company in its Endeavour to provide qualitative services to its valued clients has started e-broking trading services for its clients, thereby increasing the geographical reach of the company.

Financial Performance of Ludhiana Stock Exchange

The Stock Exchange recorded profit (before tax) of Rs. 164.77 lacs during the financial year 2010-11 as against previous years profit of Rs 118.03 lacs. However its profit (before charging depreciation, interest and tax) during the year is Rs 194.88 lacs as against Rs 153.66 lacs during the previous year. The Net profit of Exchange for the current year is Rs 67.88 lacs as against previous years profit of Rs 17.11 lacs.

Ratio Analysis:
1. Current Ratio: Current Ratio is defined as the relationship between current assets and current liabilities. It is a measure of general liquidity and is most widely used to make the analysis of a short-term financial position or liquidity of a firm. It is calculated by dividing the total current assets by total current liabilities. The Current Ratio for LSE in the financial year 2010-11 was 1.74 as compared to 1.64 in the year 2009-10. So its more or less stable over a period of time. The rule of thumb states that current ratio should be 2:1 but it is influenced by type of business, products, reputation of the concern and type of assets available to the firm. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time as and when they become due.

2. Quick Ratio: Quick Ratio also known as Acid Test or Liquid Ratio is a more rigorous test of liquidity than the current ratio. Quick Ratio is defined as the relationship between Quick Assets and Current liabilities. An Asset is said to be liquid if it can be converted into cash within a short period without loss of value. Quick Assets are calculated as Current Assets- Inventories- Prepaid Expenses. The Quick Ratio for LSE is 1.73 in the financial year 2010-11 as compared to 1.63 in the year 2009-10. So it signifies that LSE does not have more investments in inventories as

Current Ratio and Quick Ratio are more or less same. Generally 1:1 is taken as a rule of thumb for Quick Ratio as it is conventionally thought that if Quick Assets are equal to Current Liabilities then the concern is in a good position to meet its short term obligations. 3. Absolute Liquid Ratio: Absolute Liquid Ratio also known as Cash Ratio is defined as the relationship between Absolute liquid assets and Current Liabilities where absolute liquid assets include cash in hand and bank and marketable securities. Absolute Liquid Ratio for LSE is 1.41 in the financial year 2010-11 as compared to 1.27 in the year 2009-10. Thus it signifies that Cash and Bank balance form a major part of current assets for the LSE as it is still very high if we compare it with current ratio and liquid ratio. So we can say that LSE is doing well on the liquidity front as all the liquidity ratios are well above the accepted norms in the industry. 4. Working Capital Turnover Ratios: Working Capital Turnover Ratio indicates the velocity of the utilization of net working capital. This ratio indicates the number of times the working capital is turned over the course of a year. This ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilization of working capital and a low ratio includes otherwise. This ratio for LSE is 0.70 which indicates that they have enough net working capital i.e. Current Assets- Current Liabilities which is a good situation for the concern. 5. Fixed Assets to Net Worth Ratio: This ratio establishes the relationship between fixed assets and shareholders funds which comprises of share capital, reserves and surplus and retained earnings. The ratio of fixed assets to net worth indicates the extent to which shareholders funds are sunk into fixed assets. Generally, the purchase of fixed assets should be financed by shareholders equity including reserves, surpluses and retained earnings. This Ratio for LSE is 47% in the financial year 2010-11. If the ratio is less than 100%, it implies that the owners funds are more than total fixed assets and a part of the working capital is provided by the shareholders. When the ratio is more than 100%, it implies that owners funds are not sufficient to finance the fixed assets and the firm has to depend upon outsiders to finance the fixed assets. Thus we can conclude that LSE is able to manage its shareholders funds efficiently which is even more important as its a debt free company and all the money comes from shareholders only. 6. Return on Shareholders Investment: This ratio is one of the most important ratios used for measuring the overall efficiency of the firm. As the primary objective of the business is to maximize its earnings, this ratio indicates the extent to which this primary objective of business is being achieved. This ratio is of great importance to the present and prospective shareholders as well as the management of the company. As this ratio reveals how well the resources of a firm are being used, higher the ratio, better are the results. Return on Shareholders Investment is the ratio between net profit (after interest & tax) and Shareholders Funds. ROI for the LSE is 7.22% which is satisfactory from the business point of view as it is the only regional stock exchange in Punjab.

7. Earnings per Share: The Earnings per share is a good measure of profitability and when compared with EPS of similar other companies, it gives a view of the comparative earnings or earnings power of a firm. EPS calculated for a number of years indicates whether or not earning power of the company has increased. It is calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares. EPS for LSE has increased to 232.5 from 169.04 in the financial year 2010-11 when compared to previous year 2009-10. So we can say that LSE is performing better over a period of time and it has the support and confidence of investors as well. Diluted EPS indicates earning per share after assuming that all the shares which are convertible into equity shares are converted into equity shares. It is same for the LSE which indicates that there is no other source of capital used by LSE except equity shares. 8. Dividends: During the financial year 2010-11 the directors of LSE decided to declare an interim dividend of 300% i.e. Rs 30 per share to the equity shareholders. Based on the Companys performance the directors also recommended the final dividend of Rs 30 per share for the year ended 31st March 2011. The Total cash outflow of cash of the dividend for the year including Dividend tax for the year 2010-11, including interim dividends already paid would be 38.58 lacs approx. The Dividend Payout Ratio for the current year is 25.81%. 9. Listing and post listing Compliances: During the year, no company came out with Initial Public Offer under the jurisdiction of Ludhiana Stock Exchange. There were however listings on the Exchange on account of Amalgamation/ Scheme of Arrangement, Preferential Issues, Bonus Issues etc. As on 31st March 2011 there were 324 companies listed with the Exchange, 211 being Regional and 113 being Non-Regional. The Exchange has been monitoring the compliance of post-listing companies on a continuous basis. Many companies have defaulted in complying with various provisions of the Listing Agreement including non-payment of Listing Fees. The Exchange has been initiating suitable action against the defaulting companies like serving show-cause notices to the companies, suspension of trading in the scrips and initiating legal proceedings against non-compliant listed companies. The trading in the scrips of 245 companies has so far been suspended on account of non-compliance to various provisions of the Listing Agreement. However the exchange has revoked the suspension of six companies during the year, as these companies have complied with pending post listing compliances with the Exchange.

10. Status and Future of Subsidiary: The subsidiary company i.e. LSE Securities Ltd is registered as Stock Broker at Bombay Stock Exchange (BSE), National Stock Exchange (NSE), MCX Stock Exchange (MCX-Sx). Trading at NSE and BSE in Capital Market Segment: During the year under review, the subsidiary company has recorded a turnover of Rs 9076 crores and Rs 5616 crores in Capital

Market segment of the National Stock Exchange of India Limited and the Bombay Stock Exchange, Mumbai respectively. As on 31st March 2011, there have been total 165 SEBI Registered sub-brokers of the subsidiary company in NSE and 130 SEBI Registered sub-brokers in BSE.

Future & Options Segment of NSE: During the year under review the subsidiary company has recorded a turnover of Rs 102680 Crores in the Futures& Options Segment of National Stock Exchange of India Limited.

Currency Segment: During the year, the subsidiary company got good response in Currency Derivatives Segments. The Turnover in Currency Derivatives was Rs 970 Crores in NSE as compared to the previous year Rs 70.61 crores and Rs. 381 Crores in MCX-SX Stock exchange during the year. Depository Participant Services: The business of Depository Participant (DP) business is increasing day by day. The subsidiary company has opened during the year 31 st March 2011 around 2354 new accounts in CDSL, 241 accounts in NSDL and 22 accounts in newly started commodities segment business. Client Registration Department: During the year under review the subsidiary company has registered around 3662 clients and successfully implemented all compliances as framed by SEBI, NSE, BSE, and MCX-SX Stock Exchanges.

Capital Structure and Financing:

In order to run and manage a company, funds are needed. Right from the promotional stage upto end, finance plays an important role in companys life. If funds are inadequate, the business suffers and if the funds are not properly managed, the entire organization suffers. It is therefore necessary that correct estimate of the current and future need of capital be made to have an optimum capital structure which shall help the organization to run its work smoothly and without any stress. Estimation of capital requirements is necessary, but the formation of a capital structure is important. The term Capital structure refers to the relationship between the various long-term forms of financing such as debentures, preference share capital and equity share capital. Financing the firms assets is a very crucial problem in every business and as a general rule there should be a proper mix of debt and equity capital in financing the firms assets. The use of long-term fixed interest bearing debt and preference share capital along with equity shares is called financial leverage or trading on equity. It is true that capital structure cannot affect the total earnings of a firm but it can affect the share of earnings available for equity shareholders. As far as LSE is concerned they have employed only equity capital which means it is a debt free company. They have 70000 equity shares of Rs 10 each as paid up capital and Rs 190223097 of Reserves and Surplus. It clearly indicates that they want to finance their assets from internal funds and as a result avoid external funding. It also increases the earnings available to equity shares as all the profit belongs to equity shareholders only.

The following are the advantages of having capital structure made up of equity shares alone:
Equity shares do not create any obligation to pay a fixed rate of dividend. Equity shares can be issued without creating any charge over the assets of the company. It is a permanent source of capital and the company has not to repay it except under liquidation. Equity shareholders are the real owners of the company who have the voting rights. In case of profits, equity shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.

At the same time there are certain drawbacks of just having equity shares in the capital structure:
If only equity shares are issued, the Company cannot take the advantage of trading on equity. As Equity capital cannot be redeemed, there is danger of over capitalisation. During prosperous periods higher dividends have to be paid leading to increase in the value of shares in the market and speculation. Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.

Factors Influencing Prices on Stock Exchange

There are number of factors which influence the prices of shares on a stock exchange. Some factors are related to the concerned company, some to the general economic situation in the country and some to the political and government policies. These factors are discussed as follows:

1. Financial Position of the company: The Financial position of the company directly influences
the prices of its shares. When a company shows good results by increasing its sales and profits then its shares as well command a good price in the market. The rate of dividend declared by a company also influences the prices of shares. A higher dividend paying company will attract more investors. If company fails to pay dividend then its shareholders will start selling their holdings and the prices of shares will go down.

2. Demand and Supply Position: Like any other commodity the prices of shares are influenced
by the demand and supply position in the market. The shares in more demand will command a higher price. If the supply of shares is more then their prices will go down. 3. Role of Financial Institutions: The Financial Institutions are playing an important role in influencing the prices of shares. The institutions like LIC, Unit Trust of India, Industrial Finance Corporation ICICI purchase shares of good companies in bulk. This not only gives a good name to the company (financial institutions showing interest in these companies) but also reduces the supply of shares. Such purchases increase the prices of shares. On the reverse when institutions start selling their holdings, then price of such shares decline with the increase in supply. 4. Lending Rates: Lending rate influences the supply of money which ultimately affects the prices of shares. Reserve Bank of India fixes the bank rate for re-discounting facilities to commercial banks. The Bank Rate governs the rate of interest charged by Commercial Banks. The low lending rates of banks will result in more supply of money and it will increase their prices. On the other hand if money supply is low then prices of shares will go down. 5. Trade Cycles: The stage of trade cycles at a particular period also influences the share prices. In the period of boom the prices of shares go up because of overall prosperity. The situation of depression brings stagnation in growth and prices of shares go down.

6. Speculation Activities: The speculation activities of operators at a stock exchange influence

prices of shares. The speculators may create artificial scarcity of some shares by purchasing available shares. Once they control the supply of a particular share then they dictate its prices. The operations of bulls, bears and stags directly influence the prices of shares on a stock exchange. 7. Government Control: The policies of the government also influence the prices of shares. When the government gives encouragement through concessions or subsidies for the expansion and diversification of existing units or setting up of new units then money market will grow. Any government policy putting restrictions on industrial activity will depress share prices.

Some significant Accounting policies:

1. Accounting Convention: The accounts are prepared on accrual basis under the historical cost
convention in accordance with the accounting standards referred to in sub section (3C) of Section 211 and other relevant provisions of Companies Act 1956.

2. Revenue Recognition: (a) Listing Fee is recognized in respect of those companies, where it is reasonably certain that the
ultimate collection will be made. (b) Interest income is recognized on a time proportion basis taking into account the amount outstanding and the rate applicable. (c) Dividend from investment in shares is recognized when right to receive payment is established.

3. Fixed Assets: (a) Fixed Assets are stated at historical cost less accumulated amount of depreciation. (b) Cost of fixed assets comprises purchase price and nay attributable expenditure for bringing an 4. 5. 6. 7.
asset to its working condition for the intended use. Intangible Assets: Intangible Assets are stated at cost less accumulated amount of amortization. Amortization: Intangible assets are amortized on straight line method. These assets are amortized over their estimated useful life. Inventories: Stock of stationary is valued at cost or net realizable value whichever is lower. The cost in respect of inventory is computed on FIFO basis. Borrowing Costs: Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset, are capitalized as part of the cost of the asset. Other borrowing costs, if any, are recognized as an expense in the period in which they are incurred. Impairment of Assets: At each balance sheet date an assessment is made whether any indication exists that an asset has been Impaired. If any such indication exists, an impairment loss i.e. the amount by which the carrying amount of an asset exceeds its recoverable amount is provided in the books of account. Accounting for taxes on Income: The accounting treatment followed for taxes on income is to provide for current tax and deferred tax. Current tax is the aggregate amount of income tax determined to be payable in respect of taxable income for a period. Deferred tax is the tax effect of timing difference between taxable income and accounting income that originates in one period and are capable of reversal in one or more subsequent period.

8.

9.

Project Specific Analysis:

Under the project Factors affecting the investors to invest in Stock Market I have tried to understand the perception of the investors and the factors they generally consider before making an investment decision. Thus a survey has been conducted in the research to understand the investment pattern of investors and their perception about the market. A total of 100 investors were surveyed and a questionnaire has been prepared for the same. For designing the questionnaire all the requisites of a valid questionnaire as learned in the 2nd semester were followed and all the factors were tried to be incorporated in the questionnaire as I think were important from the investors point of view with the knowledge I have gained over 1st and 2nd semester after studying Micro and Macro- Economics. The following factors were considered for the survey:

1. 2. 3. 4. 5. 6. 7. 8. 9.

Savings of people. Knowledge about stocks. Economic Stability Safety of Investments Return On Investments Government Policies Budget GDP Influence of friends and relatives.

To get the responses of people over these factors the 5 point likert scale was used with 1 being strongly disagree and 5 being strongly agree. A part from these factors certain other questions such as income, age, profession were asked to understand the characteristics of sample in a better way. The sample as earlier mentioned were 100 investors and was limited to the city of Ludhiana as the purpose was to know about the perception of investors in the city of Ludhiana only as it is the industrial hub of Punjab.

Characteristics of Sample:
To know about the characteristics of sample of people surveyed there were six questions asked relating to their age, sex, profession, income, and segment of trade and frequency of trade. This information was important to understand the perception of people giving their responses on a likert scale about the factors that they think are important. The following were the outcome of the responses of 100 investors surveyed in the project.

15-20 20-30 30-40 >40

The following pie chart indicates the age structure of the investors. Out of 100 investors 40 belong to the age group of above 40 years, whereas just 5 investors comprises of age-group 15-20. 32 investors fall under the age-group 20-30 years and rest form the part of 30-40 age group. So as we can see maximum investors belong to the middle age group I.e. 20-40 years which indicates that people generally start investing when they start earning and only 5 people are in the age-group 15-20 years which means teenagers generally dont invest without the permission of their elders as they are more or less dependent on elders for their funds.

90 80 70 60 50 40 30 20 10 0 male female Series1

Then out of 100 investors we can see that it is a male dominated market as 78 investors who were surveyed were male investors and this survey was more or less carried out in Ludhiana Stock Exchange over a period of 10 days where investors generally come to trade.

Businessman doctor Advocate Students Others

As we can see from the pie chart 43 people belong to the business class and just 12 people i.e. 7 doctors and 5 advocates belong to the profession class whereas students form another important part as they constitute 26% of the respondents. The rest i.e. 19% become a part of others that includes teachers, financial services etc. The students here belong most of them to the age-group 20-30 which means they are pursuing professional courses such as MBA, MBE etc. It also indicates that Ludhiana is the hub for industries and small entrepreneurs as almost 45% of the people surveyed belong to business families. It indicates the grip that industries or business have over the psychology of people in the city here.

Share market commodity market currency trading Share market & Commodity market Commodity market & Currency Share market & Currency share market, Commodity& Currency

The following pie chart indicates the segment where respondents put their money. As we can see the major share is occupied by the share market which means that most of the respondents i.e. almost 75% of people like to put their money in the stock market. Commodity market and Currency market total constitute 16% of total respondents which clearly suggest that investors in Ludhiana dont have too much faith in these markets or they dont have much knowledge about these markets as they are the recent ones introduced after the approval of SEBI. So in Ludhiana its about putting the money in stock market and not bothers about other segments of trading. Some of the traders also like to invest in one or more segments i.e. 11 out of 100 invest in more than one segment of market and there were only 3 investors who have traded in all the three segments. Another striking highlight of the survey was that no investor traded in commodity and currency market together while they have traded in share and commodity or currency and commodity segment or all the three which again indicates the dominance of share market in the psychology of investors in Ludhiana.

40 35 30 25 20 15 10 5 0 Daily Weekly Monthly Yearly Series1

The following bar graph indicates the frequency of trades done by the investors. From the diagram we can see that around 32 investors are regular traders or we can say that these are those people who have made trading their business. While 25 and 37 investors are those who trade on weekly and monthly basis respectively. So they are the ones who are regular investors but not treat trading as their profession or business and their primary purpose is not to trade. Whereas just 7 people trade on yearly basis. Basically these are long-term investors who dont indulge in trading frequently and wait for the companies to declare dividends or other news which influence them to trade in the market but generally they like to hold their shares for a very long period of time. We can also conclude that daily traders are more or less speculators and make their profit or loss out of speculative activities as they most of the time indulge in intraday trading.

<100000 100000-300000 300000-500000 >500000

The following pie chart shows the segregation of income among the group of investors surveyed. 34 investors belong to the income group of less than 1 lakh which includes most of the students pursuing professional courses as mentioned earlier and who is in the age group of 20-30 years. 17 investors belong to the income group of 1-3 lacs as these comprises of most of the professionals such as doctors and advocates and is generally of age group 30-40. Rest comprises the income group of above 3 lacs and these are people who are of age-group greater than 40 and who have their own businesses or are small and medium entrepreneurs.

Data Analysis through SPSS:

SPSS is a statistical tool used to make useful conclusions and findings related to the particular research and are one of the widely used software by big finance companies to extract useful data from the bulk of data they generally have and to take some important decisions using the extracted data. SPSS help in running various statistical functions such as factor analysis, correlation analysis, Cluster analysis, reliability tests etc to support their decisions. Under the project or research undertaken by me through the survey, I decided to run correlation analysis as well as factor analysis to reach some useful findings related to the research. I ran correlation analysis to see how much of the factors taken for study are correlated with each other. A Positive Correlation basically means that if one variable moves in one direction then the other variable also moves in the same direction. A negative correlation means that if one variable moves in one direction then the other variable moves in the opposite direction. Then on the above factors I had run a factor analysis. Before moving ahead let us move a step back and understand what factor analysis is and why it was used in this project and how I implemented factor analysis in this project.

What is Factor Analysis?

Factor Analysis is used to uncover the latent structure (dimensions) of a set of variables. It reduces attribute space from a larger number of variables to a smaller number of factors and as such is a Nondependent procedure i.e. it does not assume that a dependent variable is specified. It is a method of analyzing data where there is no distinction between a dependent and independent variable, rather in it all the variables are taken to analyze the inter-dependent relationship among them.

Why Factor Analysis?

One of the major features of Factor Analysis is data reduction and in doing so it lists the factors which explain the most variability in the components. This is the reason for which factor analysis is used. The whole rationale of this phase of the project was to find out the factors which investors agree affect their investment decisions. I tried to incorporate all the factors which influence investment decision of investors but with the help of factor analysis I could find out the most influential factors. Hence by understanding which factors are of most significance to the investors the company can emphasize on these factors to the investors.

Interpretation of the Analysis:

KMO and Bartletts Test:

KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. Bartlett's Test of Sphericity Approx. Chi-Square df Sig. .596 183.291 36 .000

High values (close to 1) generally indicate that a factor analysis may be useful with the data received from respondents. If the value is less than 0.50, the results of the factor analysis probably wont be very useful. In the above case the Kaiser Meyer Olkin Measure of Sampling Adequacy is 0.596 which indicates that analysis is useful and we may proceed with our analysis.

Bartletts Test of Sphericity tests the hypothesis that the correlation matrix is an identity matrix which would indicate that the variables are unrelated and therefore unsuitable for structure detection. Small values less than 0.05 of the significance level indicate that a factor analysis may be useful with the data. Here the significance level is .000 which sufficiently suggests that Factor Analysis done above is acceptable.

Total Variance Explained Initial Eigen values Total 2.470 1.835 1.124 .926 .717 .705 .531 .415 .277 % of Variance 27.443 20.387 12.492 10.290 7.962 7.831 5.897 4.616 3.082 Cumulative % 27.443 47.831 60.323 70.613 78.574 86.406 92.302 96.918 100.000 Extraction Sums of Squared Loadings Total 2.470 1.835 1.124 % of Variance 27.443 20.387 12.492 Cumulative % 27.443 47.831 60.323

Compon ent 1 2 3 4 5 6 7 8 9

Rotation Sum Total 2.084 2.061 1.285

%o

Extraction Method: Principal Component Analysis.

This table shows the Initial Eigen values and we consider the factors or components whose Eigen value is greater than 1. Here it means that there are three factors into existence as there are three values greater than 1 in Eigen value column and it also shows the percentage of variance explained by these factors. It means that first factor have 27% influence on the investors decision to invest in stock market and similarly second and third factor has 20% and 12% influence on investors respectively. So in totality the variables or factors considered under study have 60% influence on the investors decision of investment and anything above 40% of the influence or variance explained is acceptable for any research undertaken. So it indicates that we may proceed with the analysis and the variables under study are important factors for the investors.

The Scree Plot helps us to determine the optimal number of components. The Eigen value of each component in the initial solution is plotted. Here the criterion for Eigen value was taken as 1.0. From the given figure we can see that nine variables can be clubbed into three factors.

Generally the components which are extracted remain on the steeper slope and the components on the shallow slope contribute little to the solution, so again the components which contribute lesser to the analysis are summarized and reduced. The first three variables contribute the most to the analysis and while the remaining variables have less significance.

Correlation Matrix investors Economi knowledg Savings Correlation Savings investors knowledg e Economic stability Safetyofin vestments Returnoni nvestmen ts Govtpolici es Budget GDP Friends influence -.117 -.240 -.144 -.071 .287 .143 .085 -.223 .285 .169 .143 -.084 .348 -.014 .118 -.001 -.145 -.095 .037 -.046 1.000 .417 .451 -.192 .417 1.000 .388 .161 .451 .388 1.000 -.015 -.192 .161 -.015 1.000 .307 .101 .277 .197 1.000 -.145 -.095 .037 -.046 .115 .392 1.000 .590 .277 .285 .169 .143 -.084 .108 1.000 .392 .383 .101 .287 .143 .085 -.223 1.000 e .108 c Return on Safetyofin investment Govtpolic s .307 ies -.117 Budget -.240 GDP -.144 Friends influence -.071

stability vestments .115 .136

.136

.383

.590

1.000

.197

.348

-.014

.118

-.001

The above correlation matrix depicts the correlation between various factors. The correlation between same factor is 1. The correlation value is said to be significant if it lies between 0.2 and 0.8. It means those two variables have a good chance to be loaded in the one factor only as they have an impact on each other. As we can see from the table savings and return on investments has correlation value of 0.307 which is significant and later on we would see that both the variables are loaded in the same factor. Similarly we can see that the correlation value of Govt. policies and Budget is 0.417 and Govt. Policies and GDP are 0.451. So these three variables should be loaded under one factor. So correlation analysis helps us in identifying which variables will be loaded in one factor.

Rotated Component Matrix Component 1 Savings investors knowledge Economic stability Safetyofinvestments Returnoninvestments Govtpolicies Budget GDP Friends influence Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 6 iterations. .464 .501 .776 .758 .625 .717 .782 .687 .886 -.401 2 -.488 -.483 3

The following Component matrix tells us which variables are loaded in which factor. As we can see from the table that there are three factors and all the nine variables are placed under one of those three factors. Here the loading cut off for any variable was placed at 0.40 which means the value of any variable to be placed in one of those factors should be 0.40. The least in the table as we can see is of savings i.e. 0.464. From the following table we can see that savings, Investors knowledge, Economic stability, safety of investments and return on investments form part of first factor. Govt. Policies, Budget and GDP form a part of second factor whereas Influence of friends itself forms another factor. So in all these nine variables taken for study are now narrowed down to three factors which will be named under the next segment. Another striking factor is that no variable is cross loaded. A factor is said to be cross loaded if one variable falls under two factors and the difference is not greater than 0.2 of loading factors of that particular variable. The particular values of the variable i.e. 0.501 for investors knowledge is known as loading factor for that particular variable i.e. Investors knowledge.

Naming the Factors

Factor 1 Savings Investors knowledge Economic stability Safety of investments Return On investments

The first factor comprises of Savings, Investors knowledge about stocks, Economic Stability, Safety of Investments and Return On investments. On the basis of these variables this factor can be named as Company or Stock Specific factors. Return on investments and Safety of investments fall directly in this category. Investors knowledge about particular stocks and savings enough to support the minimum requirements of investment again drived me for naming this factor as Company Specific Factors. Economic stability though doesnt fall in this category directly but again plays an important part while deciding in which stock to invest in. Thus in my opinion all these variables form one factor i.e. Stock or Company Specific factors. All these variables put under one factor in totality has 27% influence on the investors in Ludhiana to invest in stock market.

Factor 2

Govt. Policies Budget GDP

The second factor comprises of Govt. Policies, Budget and GDP. On the basis of these variables this factor can be named as Macro-Economic factors which are not in the hands of particular investors but influences their decision to invest in stock market. Govt. Policies such as Monetary and fiscal Policy or Credit policy announced by RBI plays an important role in influencing investors decision of investment. Similarly respondents think that Budget also plays an important role in deciding which stocks to invest in. GDP i.e. National Income of the country is also considered by the investors while deciding their investment options. Thus we can say that all these variables or policies related to these variables are decided by the Govt. or authorities by keeping in mind the macro-economic situation of the economy. Thus this factor can be named as Macro-economic Factors. This factor in totality has 20% influence on the decision of the investors in Ludhiana to invest in stock market.

Factor 3

Friends influence

There is only one variable under this factor i.e. influence of friends or relatives on the decision of the investor to invest in stock market. Thus this factor can be named as Psychological factors as they just follow the sentiments of other people or they generally are influenced to invest because his/her parent, friends or relatives invest in a particular stock. This is not rational on the part of investor but study reveals that this alone variable has 13% influence on the investors in Ludhiana which makes them invest in stock market. Thus this variable cant be neglected and is important to study the perception of investors.